SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER:
DECEMBER 31, 1999 0-22545

DSI TOYS, INC.
(Exact name of Registrant as specified in its charter)

TEXAS 74-1673513
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1100 WEST SAM HOUSTON PARKWAY NORTH
HOUSTON, TEXAS 77043
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (713) 365-9900

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value Nasdaq

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting common stock held by non-affiliates
of the Registrant as of March 15, 2000 was $11,259,499.

As of March 15, 2000 there were 9,066,365 shares of common stock, $.01 par
value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the registrant's 2000
Annual Meeting of Shareholders to be held on May 23, 2000 are incorporated by
reference in Part III of this Form 10-K.

TABLE OF CONTENTS

Page

Safe Harbor Statement........................................................1

Part I

Item 1. Business..........................................................1

Item 2. Properties.......................................................12

Item 3. Legal Proceedings................................................12

Item 4. Submission of Matters to a Vote of Security Holders..............13

Part II

Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ...........................................14

Item 6. Selected Consolidated Financial Data.............................16

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................17

Item 7A. Quantitative and Qualitative Disclosures about Market Risk ......22

Item 8. Financial Statements and Supplementary Data......................22

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................22

Part III

Item 10. Directors and Executive Officers of the Registrant...............23

Item 11. Executive Compensation...........................................23

Item 12. Security Ownership of Certain Beneficial Owners and Management...23

Item 13. Certain Relationships and Related Transactions...................23

Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ........................................................23

Signatures..................................................................24

Index to Consolidated Financial Statements and Schedule....................F-1

Index to Exhibits..........................................................E-1

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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995: STATEMENTS IN THIS REPORT THAT ARE NOT HISTORICAL FACTS, INCLUDING
STATEMENTS ABOUT PLANS AND EXPECTATIONS REGARDING PRODUCTS AND OPPORTUNITIES,
DEMAND AND ACCEPTANCE OF NEW AND EXISTING PRODUCTS, CAPITAL RESOURCES AND FUTURE
FINANCIAL CONDITION AND RESULTS ARE FORWARD-LOOKING. FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, WHICH MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN
FUTURE PERIODS TO DIFFER MATERIALLY AND ADVERSELY FROM THOSE EXPRESSED. THESE
UNCERTAINTIES AND RISKS INCLUDE CHANGING CONSUMER PREFERENCES, LACK OF SUCCESS
OF NEW PRODUCTS, LOSS OF THE COMPANY'S CUSTOMERS, LIQUIDITY OF THE COMPANY,
COMPETITION, AND OTHER FACTORS DISCUSSED IN THIS REPORT AND FROM TIME TO TIME IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

Except as otherwise indicated, references to the "Company" refer to DSI
Toys, Inc. and its wholly owned subsidiary, DSI(HK) Ltd. ("DSI(HK)"). The terms
"fiscal year" and "fiscal" refer to the Company's fiscal year which is the year
ending January 31 of the following calendar year mentioned (e.g., a reference to
fiscal 1998 is a reference to the fiscal year ended January 31, 1999). Effective
December 31, 1999, the Company changed its fiscal year end from January 31 to a
calendar year end.

PART I

ITEM 1. BUSINESS

GENERAL

The Company designs, develops, markets and distributes high quality,
innovative dolls, toys and consumer electronics products. Core products include
youth electronics such as TECH LINK(R) brand communications products,
KAWASAKI(R) brand musical toys, GIRLZ RULE!(TM) brand interactive electronics
and GEAR HEAD(TM) brand remote control vehicles; BLOCKMEN(R) brand building
systems, and a full range of doll brands including SWEET FAITH(TM), LITTLE
DARLINGS(TM), PRIDE & JOY(TM), HUSH LI'L BABY(TM), and the ELITE(R) brand of
LIFETIME PLAY DOLLS(TM). Incorporated in Texas in 1970, the Company principally
was a supplier of non-proprietary toys to deep discount stores and regional drug
store chains. With the addition of new senior management personnel in 1990, the
Company began to market its product line to major toy retailers by emphasizing
packaging and developing in-house brands. Further, in fiscal 1993, the Company
began to emphasize the development and marketing of proprietary products. The
Company's proprietary product lines consist of products that (i) are licensed
from outside inventors and designers, (ii) incorporate trademarks licensed to
the Company, (iii) are designed in-house, or (iv) are manufactured using Company
owned tooling, dies and molds based on a proprietary design or idea owned by the
Company or the inventor.

Traditionally a supplier of juvenile audio products and boys' toys, the
Company has diversified its product offerings in recent years. It entered the
girls' toys category with the introduction of the ROSIE(R) doll in fiscaL 1995.
Later it introduced radio-controlled vehicles such as the KAWASAKI(R) NINJA(R)
SUPERGYRO(R) motorcycle in fiscal 1997 and the BURNIN' THUNDER(TM) Super Sound
R/C vehicle in 1998. BLOCKMEN(R) brand construction sets were alsO introduced in
fiscal 1998. This expansion continued in 1999 with SWEET FAITH(TM) brand dolls,
several new offerings in radio control and infrared control vehicles and
broadening the line of BLOCKMEN(R) brand construction sets.

The Company offers several licensed products under the KAWASAKI(R) brand
name, including musical instruments and radio-controlled vehicles. In fiscal
1998, the Company expanded its utilization of licensed brands by entering into
agreements with World Wrestling Federation Entertainment, Inc. f/k/a Titan
Sports, Inc. for the right to use WORLD WRESTLING FEDERATION(R) logos and
performers, and with Discovery Communications, Inc. for the right to use
DISCOVERY CHANNEL(R) (and related) trademarks. In fiscal year 1999, the Company
acquired licenses from AM General Corporation for HUMMER(R) and

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HUMVEE(R). Also in fiscal year 1999, it licensed CROCODILE HUNTER(TM) and
related trademarks, names, logos, and symbols. The Company also has developed
and currently is marketing products incorporating several in-house brand names,
including TECH-LINK(TM) (walkie-talkies), LA ROCK(R) (musical toys and audio
products), AMERICAN FRONTIER(TM) (western role play toys), BLOCKMEN(R)
(construction sets), and GEAR HEAD(TM) (radio control and infrared control
vehicles). The Company believes that it is the leading supplier of non-branded
walkie-talkies to domestic toy retailers.

The Company sells primarily to retailers, including mass merchandising
discounters such as Wal-Mart, Kmart and Target, specialty toy retailers such as
Toys "R" Us, Kay-Bee Toy & Hobby, FAO Schwarz, ZanyBrainy, Noodle Kidoodle and
QVC, Inc., and deep discount stores such as Family Dollar Stores, Inc.,
Consolidated Stores Corporation and Value City Department Stores, Inc. Although
the Company's sales have been made primarily to customers based in the United
States, international net sales accounted for approximately 23% of the Company's
net sales during fiscal 1999.

Approximately 65% of the Company's net sales (by dollar volume) were made
free on board ("FOB") Asia during fiscal 1999. Products sold FOB Asia are
shipped directly to customers from the factory and are not carried by the
Company in inventory. The Company does maintain an inventory of certain products
in its Houston, Texas facilities, principally to support sales of continuous
stock items offered by customers on a year-round basis.

On April 15, 1999, the Company entered into a Stock Purchase and Sale
Agreement (the "Stock Purchase Agreement") with MVII, LLC, a California limited
liability company controlled by E. Thomas Martin ("MVII"). Pursuant to the Stock
Purchase Agreement, MVII purchased from the Company 566,038 shares of its Common
Stock for $1.2 million on April 15, 1999, and an additional 1,792,453 shares of
its Common Stock for $3.8 million on June 1, 1999. Also, pursuant to the Stock
Purchase Agreement, on April 21, 1999, MVII commenced a tender offer for 1.6
million shares of the outstanding Common Stock at $4.38 per share net to the
seller in cash (the "Offer"). On May 26, 1999, MVII accepted for payment 1.6
million shares that were validly tendered and not withdrawn in the Offer by the
Company's shareholders. The Stock Purchase and Sale Agreement and the
transactions contemplated thereby were approved by the Company's shareholders at
the Annual Meeting of Shareholders held on May 24, 1999.

As a result of the transactions consummated pursuant to the Stock Purchase
Agreement, MVII made a total investment in the Company's Common Stock of $12
million. Of that $12 million, $5 million was paid by MVII directly to the
Company for Common Stock. After those transactions, MVII was the record owner of
approximately 47% of the Company's outstanding shares of Common Stock. When
MVII's record ownership is combined with MVII's rights under the Shareholders'
and Voting Agreement dated April 15, 1999, by and among the Company, MVII,
Messrs. M.D. Davis, Barry Conrad, Joseph Matlock, Douglas Smith and Rust
Capital, Ltd., ("Rust Capital"), a limited partnership controlled by Mr. Jack
Crosby (the "voting Agreement"), executed in connection with the Stock Purchase
Agreement, MVII became the beneficial owner of approximately 61% of the
Company's outstanding shares of Common Stock. The Voting Agreement also entitles
MVII to nominate all but two of the members of the Company's board of directors.
On June 1, 1999, the Company accepted the resignations of Messrs. Crosby, Smith,
Conrad and Richard Neitz from its Board. Such vacancies have been filled by
MVII's nominees, namely Messrs. E. Thomas Martin, Robert L. Burke, Joseph S.
Whitaker, and John McSorley. At the Company's Annual Meeting of Shareholders on
May 24, 1999, the Company's shareholders approved these appointments to the
Board. On June 1, 1999, E. Thomas Martin ("Martin") was appointed by the Company
to serve as Chairman of the Board.

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its right of first refusal contained in the Voting Agreement to purchase 72,101
shares of Common Stock from Conrad. Following these transactions, MVII owns of
record, or beneficially, 4,194,238 shares of the Company's Common Stock which,
as of March 15, 2000, represents 46% of the total Common Stock issued and
outstanding. On December 17, 1999, Rust Capital sold 291,421 shares of Common
Stock to Martin. Martin purchased such shares pursuant to MVII's right of first
refusal contained in the Voting Agreement, which was assigned by MVII to Martin
on December 15, 1999.

As of January 7, 2000, the Company acquired Meritus Industries, Inc.
("Meritus"), a privately held toy manufacturer headquartered in Fairfield, New
Jersey, with offices and distribution facilities in Hong Kong. Pursuant to the
terms of the merger, the Company acquired all of the issued and outstanding
stock of Meritus for 600,000 shares of the Company's Common Stock and $2.8
million in other consideration paid to the shareholders of Meritus.
Contemporaneously with the merger, the Company satisfied $4.4 million of
Meritus' debt. Meritus manufactures and markets dolls, doll houses, doll
accessories, and girls' toys such as BABY BEANS(R) brand soft bean bag dolls,
FOREVER GIRL FRIENDS (R) brand accessories for 11-1/2" fashion dolls, and LITTLE
DARLINGS(TM) brand value-priced action feature dolls. Meritus recently
introduced the ELITE DOLLS(TM) brand which was created specifically to
manufacture and market "Lifetime Play Dolls," a new line of exquisite 18" dolls
and accessories, suitable for playing or collecting. Meritus products are
available at retail toy outlets and specialty stores and are sold in more than
40 countries worldwide.

As a result of its merger with Meritus, the Company acquired three
wholly-owned Hong Kong subsidiaries; Meritus Industries Limited, RSP Products
Limited, and Elite Dolls Limited, which subsidiaries are engaged in the
Company's doll manufacturing operations. The Company is in the process of
consolidating the three newly-acquired subsidiaries with DSI(HK).

PRODUCTS

The following table depicts the Company's net sales, as a percentage of
total net sales, by product category for the fiscal years indicated.

Product Category 1999 1998 1997
----- ----- -----
Juvenile audio products 61.0% 72.6% 50.2%
Girls' toys ........... 14.5 5.8 31.0
Boys' toys ............ 19.0 14.5 9.8
Other ................. 5.5 7.1 9.0
----- ----- -----
Total ........... 100.0% 100.0% 100.0%
===== ===== =====

Between 30% and 40% of the Company's products (by dollar volume of net
sales) are replaced each year through the introduction of new products. As a
result of this turnover, product development is critical. The Company develops
both proprietary and non-proprietary products. The Company's proprietary product
lines consist of products that (i) are licensed from outside inventors and
designers, (ii) incorporate trademarks licensed to the Company, (iii) are
designed in-house, or (iv) are manufactured using Company owned tooling, dies
and molds based on a proprietary design or idea owned by the Company or the
inventor. Proprietary toys accounted for approximately 72%, 47% and 58% of the
Company's net sales for fiscal 1999, 1998, and 1997, respectively. The Company's
proprietary products generally yield higher gross margins to the Company than
non-proprietary products.

Non-proprietary products are defined by the Company as toys designed and
manufactured by independent toy manufacturers and marketed by the Company,
usually on an exclusive basis in the Company's primary markets. The Company
selects its non-proprietary products after an evaluation of several factors,
including the quality and pricing of the product, as well as whether the product
presents

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an opportunity for the Company to utilize packaging and marketing to
differentiate the product from other toys. The Company often markets these toys
under in-house brands, such as DIGI-TECH(TM), MY MUSIC MAKER(R), and LA ROCK(R).
Non-proprietary products accounted for approximately 28%, 53% and 42% of the
Company's net sales for fiscal 1999, 1998 and 1997, respectively.

LICENSE AGREEMENTS

The Company enters into license agreements with toy inventors and
designers who grant the Company the right to manufacture and market a product or
technology. The Company also enters into license agreements with companies who
grant the Company the right to manufacture and market a product utilizing a
distinctive trademark or brand. In return, the Company agrees to pay a
percentage of net sales ("royalty rate") of the licensed product. Typically,
these royalty rates range from 4% to 7% of net sales. Sales of licensed products
such as the BURNIN' THUNDER(TM) brand Super Sound R/C vehicles and SWEET
FAITH(TM) brand dolls, accounted for approximately 54%, 24% and 46% of the
Company's net sales during fiscal 1999, 1998 and 1997, respectively. The
acquisition of licenses also typically requires the payment of non-refundable
advances and/or guaranteed minimum royalties.

The Company has a license agreement with Kawasaki Motors Corp., USA
authorizing the Company to use the KAWASAKI(R) brand name in connection with
several different products, including a complete line of electronic musical
instruments, including keyboards, and the KAWASAKI(R) NINJA(R) SUPERGYRO(TM)
brand Motorcycle. The current agreement expires December 31, 2002.

Effective November 1, 1998, the Company entered into a consumer products
license agreement with World Wrestling Federation Entertainment, Inc. f/k/a
Titan Sports, Inc. This agreement authorized the Company to use certain
intellectual property associated with World Wrestling Federation events,
including its name, the logo, and the names, nicknames and identifying indicia
of the individuals who perform at World Wrestling Federation events in
connection with the sale, marketing and distribution of certain of the Company's
products. This agreement expires on December 31, 2000. The Company executed a
similar agreement on May 10, 1999, that expanded the licensed product offerings
to include toy guitars. This agreement expires on December 31, 2001.

On December 1, 1998, the Company entered into a retail license agreement
with Discovery Communications, Inc. authorizing the Company to use the
trademarks DISCOVERY CHANNEL(R), EXPLORE YOUR WORLD(R), DISCOVERY FACTS(R), and
REALITY RULES(R) as well as certain DISCOVERY CHANNEL(R) photography, images and
artwork in connection with the sale, marketing and distribution of certain of
the Company's products. This agreement expires on December 31, 2001.

Effective September 9, 1999, the Company entered into a licensing
agreement with AM General Corporation authorizing the Company to utilize the
trademarks HUMVEE(R) and HUMMER(R) and the Vehicle Grill Design logo on an array
of products including walkie-talkies, infrared control vehicles, and
construction sets. This agreement expires on December 31, 2001.

The Company entered into a retail license agreement with Discovery Channel
Catalogue, LLC on December 10, 1999, whereby the Company obtained the rights to
manufacture, sell and distribute certain products, including toy watches,
walkie-talkies and toy flashlights using the licensed mark, CROCODILE
HUNTER(TM), together with certain other trademarks, names, titleS, logos and
symbols. This agreement expires on December 31, 2001.

As of December 31, 1999, the aggregate guaranteed royalties payable by the
Company under certain of these licenses total approximately $297,000 in fiscal
2000 and $408,000 thereafter through fiscal 2002.

The Company believes that by developing licensed products based
principally on popular, classic properties and trademarks, it can establish a
licensed product portfolio that is characterized by a longer

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product life cycle than is typical in the toy industry. The Company intends to
continue to develop its licensed product line by targeting licensing
opportunities to take advantage of licensor advertising, publicity and media
exposure.

CUSTOMERS

The Company made sales to over 770 different customers in approximately 44
countries during fiscal 1999. The table below sets forth the Company's net sales
by geographic area as a percentage of total net sales for the specified fiscal
years.

Geographic Area 1999 1998 1997
----- ----- -----
United States ................... 77.4% 79.0% 80.6%
Europe .......................... 13.6 12.8 10.8
Canada and Mexico ............... 5.0 4.0 4.2
Australia and New Zealand ....... 1.9 2.3 2.4
South and Central America ....... 0.8 1.1 1.2
Asia ............................ 0.7 0.5 0.3
Middle East and Africa .......... 0.6 0.3 0.5
----- ----- -----
Total ........................ 100% 100.0% 100.0%
===== ===== =====

The Company's principal customers are retailers, including mass
merchandising discounters such as Wal-Mart, Kmart and Target, specialty toy
retailers such as Toys "R" Us, Kay Bee Toy & Hobby, FAO Schwarz, ZanyBrainy,
Noodle Kidoodle, and QVC, and deep discount stores such as Family Dollar Stores,
Inc., Consolidated Stores Corporation and Value City Department Stores, Inc. The
Company's top five customers accounted for approximately 42.8% of the Company's
net sales in fiscal 1999. Wal-Mart accounted for 20.8% of the Company's net
sales during fiscal 1999. For the prior two fiscal years, the only customers
that accounted for more than 10% of the Company's annual net sales were Wal-Mart
(18.7%) and Toys "R" Us (10.6%) for fiscal 1998, and Toys "R" Us (22.2%) and
Wal-Mart (16.6%) for fiscal 1997. During fiscal 1999, the Company's sales to
Toys "R" Us, Wal-Mart, Kmart, Target and Kay-Bee Toy & Hobby, the five largest
toy retailers in the United States, decreased as a percentage of the Company's
net sales to 42.5% compared to 46.3% during fiscal 1998 and 57.3% during fiscal
1997. The Company does not have long-term contractual arrangements with its
customers.

SALES AND MARKETING

The Company's selling strategy consists of in-house sales personnel and a
network of independent, commission-based sales representatives. Significant
product presentations are made by either executive management, in the case of
new product presentations, or in-house sales personnel. The independent sales
representatives manage the day-to-day account administration.

New toys are marketed primarily by members of the Company's executive
management and sales department at the Company's showrooms in Hong Kong, New
York and Dallas during major, international toy shows in those cities (Hong Kong
in January, July and September/October, Dallas in January, and New York in
February and October). The Company also maintains showrooms at its headquarters
in Houston and in New Jersey.

In international markets, the Company generally sells its products to
independent distributors. These distributors retain their own sales
representatives and product showrooms where products are marketed and sold. The
Company also sells directly to international retailers, principally as a result
of contacts made at the Company's showrooms.

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ADVERTISING

In recent years, the Company allocated a majority of its advertising
budget to television promotion. The Company utilized a television campaign for
the first time in fiscal 1995 in connection with the introduction of the
ROSIE(R) doll. The Company increased its television advertising budget in fiscal
1996 and fiscal 1997, using television commercials to promote the ROSIE(R) and
PATTIE(R) dolls in fiscal 1996, and ROSIE(R), BABY PICK ME UP(TM), DREAMIE
SWEETS(R) brand dolls, and HOPPIN POPPIN' SPACEBALLS(R) in fiscal 1997. Although
the Company intends to continue to utilize a promotional strategy that includes
advertising of certain proprietary products, spending on television advertising
in fiscal 1998 was significantly reduced, and in fiscal 1999, the Company
utilized television advertising only to conduct a market test of its doll, HUSH
LI'L BABY(TM). The Company will continue to expend portions of its advertising
budget to promote its products through the Internet, public relations, special
offers, retail catalogs, advertisement in trade magazines, cooperative
promotional efforts of retailers, and cautious television advertising of certain
proprietary products.

MANUFACTURING

The Company annually contracts with 20 or more independent manufacturers
located principally in the Peoples' Republic of China (the "PRC") within a
300-mile radius of Hong Kong for the manufacture of its products. The Company
may use more than one manufacturer to produce a single product. The
manufacturers that accounted for more than 10% of the Company's purchases of
products during fiscal 1999 were Loyal Technology Co. Ltd. (16.3%), which
manufactured walkie-talkies and radios, GMT Industrial Ltd. (14.0%), which
manufactured walkie-talkies and musical toy products, Potex Toys Manufacturer
Ltd. (13.8%), which manufactured musical toy products and infrared control
vehicles, and Choy Hing Toys Industrial Co., Ltd. (12.6%), which manufactured
electronic phones and construction sets for the Company. Manufacturing
commitments are made on a purchase order basis. The Company does not have
long-term contractual arrangements with its manufacturers.

Decisions related to the choice of manufacturer for non-proprietary
products generally are based on reliability, quality of merchandise, price and
the ability of the manufacturer to meet the Company's or its customers' delivery
requirements. Proprietary products designed by the Company are placed with a
specific manufacturer whose expertise is in that type of toy. The Company
currently has its tooling placed in several different manufacturing facilities
and generally receives delivery 60 to 90 days after its orders are booked.

The Company's Hong Kong subsidiary, DSI(HK), monitors manufacturing
operations, including quality control, production scheduling and order
fulfillment from the manufacturers. DSI(HK) utilizes a quality control and
assurance staff of degreed engineers and inspectors.

The principal materials used in the production of the Company's products
are plastics, integrated circuits, batteries, corrugated paper (used in
packaging and packing material) and textiles. The Company believes that an
adequate supply of materials used in the manufacture and packaging of its
products is readily available from existing and alternative sources at
reasonable prices.

DISTRIBUTION

The Company distributes its products either FOB Asia or through direct
sales made from inventory maintained at its Houston facilities. For FOB Asia
sales, the customer places its order and shipping instructions, and the toys are
then manufactured and shipped directly from the factory to the customer or its
freight consolidator.

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Basic, continuous stock toys that are offered by retailers on a year-round
basis generally are shipped to customers by the Company from its inventory in
Houston. In addition, certain faster-selling toys are often shipped directly to
major customers for seasonal selling and are stocked by the Company in Houston
for peak season back-up and continuous supply. The Company also maintains
inventory which is intended for specific customers for peak holiday season
support, as well as some inventory which is available for smaller retailers and
for opportunistic selling strategies.

Most of the Company's larger customers have instituted electronic data
interchange ("EDI") programs to reduce the retailers' inventory carrying
requirements and place more inventory risk on the supplier. When selling toys
out of its Houston inventory, the Company participates in the EDI programs of
most of its customers who have established EDI programs, including Wal-Mart,
Kmart, Toys "R" Us, Target and Kay-Bee Toy & Hobby. Although these programs
require the Company to bear some inventory risk, the Company believes the
programs can be utilized to monitor store inventory levels, schedule production
to meet anticipated reorders and maintain sufficient inventory levels to serve
its customers.

COMPETITION

The toy industry is highly competitive. Dun & Bradstreet categorizes over
1,000 companies as toy manufacturers. Competitive factors include product
appeal, new product introductions, space allocation by the major retailers,
price and order fulfillment capability. The Company competes with many companies
that have greater financial resources and advertising budgets than the Company.
The largest United States toy companies are Mattel, Inc. and Hasbro, Inc., and
the Company considers Trendmaster, Inc., The Lego Company, Inc., Playmates Toys,
Inc., ToyMax International, Inc., Toy Biz, Inc., KIDdesigns, Inc., and MGA
Entertainment to be among its other competitors. In addition, due to the low
barriers to entry into the toy business, the Company competes with many smaller
toy companies, some of which market single products.

GOVERNMENT AND INDUSTRY REGULATION

The Company is subject to the provisions of the Federal Hazardous
Substances Act and the Federal Consumer Product Safety Act. Such Acts empower
the United States Consumer Products Safety Commission (the "CPSC") to protect
the public from hazardous goods. The CPSC has the authority to exclude from the
market goods that are found to be hazardous and require a manufacturer to
repurchase such goods under certain circumstances. The Company sends samples of
all of its marketed products to independent laboratories to test for compliance
with the CPSC's rules and regulations, as well as with the product standards of
the Toy Manufacturers of America, Inc. ("TMA"). The Company is not required to
comply with the product standards of the TMA but voluntarily does so. Similar
consumer protection laws exist in state and local jurisdictions within the
United States, as well as in certain foreign countries. The Company designs its
products to meet the highest safety standards imposed or recommended both by
government and industry regulatory authorities. To date, the Company has not
been found to be in material violation of any governmental product standard with
respect to the Company's products.

TARIFFS AND DUTIES

In December 1994, the United States approved a trade agreement pursuant to
which import duties on toys, games, dolls and other specified items were
eliminated, effective January 1, 1995, from products manufactured in all Most
Favored Nation ("MFN") countries (including the PRC). Increases in quotas,
duties, tariffs or other changes or trade restrictions which may be imposed in
the future could have a material adverse effect on the Company's financial
condition, operating results or ability to import products. In particular, the
Company's costs would be increased if the PRC's MFN status is revoked. The loss
of MFN status for the PRC would result in substantial duties on the cost of toy
products manufactured in the PRC and imported into the United States and would
most likely adversely affect the Company's financial condition and results of
operations.

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In 1996, the United States government proposed retaliatory trade sanctions
against the PRC, which would have included increased duties on selected products
but would not have included the Company's products originating in the PRC. The
United States and the PRC eventually agreed on settlement terms avoiding these
sanctions. Any future imposition of trade sanctions by the United States and
subsequent retaliatory actions by the PRC government could result in supply
disruptions and higher merchandise costs to the Company. The Company could
attempt to mitigate the effects of an increase in duties by shifting its
manufacturing to other countries, but there can be no assurance that the Company
would be successful in this regard or that the Company would not be adversely
affected.

INTELLECTUAL PROPERTY

The Company has been utilizing the mark DSI(R) since 1991, and has
registered the mark in the United States Patent and Trademark Office effective
December 28, 1999. The Company believes it has the right to use the mark in the
manner in which it is currently used.

The Company has rights to use certain United States registered trademarks
for various products and product categories currently being marketed including:
AIR GUITAR(R), BIG BAM BOOM(R), BLOCKMEN(R), ROSIE(R), TECH-LINK(R), MERITUS(R),
ELITE(R), FOREVER GIRLFRIENDS(R), and BABY BEANS(R). THE Company believes it has
the rights to use these marks for the product lines on which they are currently
used. The Company believes it has trademark rights with respect to certain
additional products and product lines, including DSI ELECTRONICS(TM), AMERICAN
FRONTIER(TM), SAX-A-BOOM(TM), SPACE SQUAD(TM), PRIDE & JOY(TM), GEAR HEAD(TM),
MISSILE STRIKE(TM), and SWEET FAITH(TM) in the United States. The Company
believes it has the right to use these marks for the product lines on which they
are, or will be, used.

HUMAN RESOURCES

As of March 22, 2000, the Company had a total of 99 employees, of whom 36
are based in Houston, 14 are based in New Jersey and 49 are employees of DSI(HK)
and are based in Hong Kong. Of the Houston based employees, 8 are engaged in
sales and marketing, 8 are involved in design and development, 6 are involved in
warehousing and distribution and 14 are involved in finance and administration.
Of the New Jersey based employees, 4 are engaged in sales and marketing, 6 are
involved in design and development, 1 is involved in warehousing and
distribution, and 3 are involved in finance and administration. Of the Hong Kong
based employees, 12 are engaged in sales and merchandising, 15 are engaged in
engineering, including product quality assurance and quality control, 13 are
involved in finance and administration and 9 are involved in shipping and
distribution. None of the Company's employees are subject to a collective
bargaining agreement. The Company has experienced no work stoppages and believes
that its labor relations are satisfactory.

RISK FACTORS

CHANGING CONSUMER PREFERENCES, RELIANCE ON NEW PRODUCT INTRODUCTION. As a
result of changing consumer preferences, many toys are successfully marketed for
two years or less. There can be no assurance that (i) any of the Company's
current successful products or product lines will continue to be popular with
consumers for any significant period of time or (ii) new products and product
lines introduced by the Company will achieve an acceptable degree of market
acceptance, or that if such acceptance is achieved, it will be maintained for
any significant period of time. Furthermore, sales of the Company's existing
products are expected to decline over time and may decline at rates faster than
expected. The Company's success is dependent upon the Company's ability to
enhance existing product lines and develop new products and product lines. The
failure of the Company's new products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have a material
adverse effect on the Company's financial condition and results of operations.

DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS. For fiscal 1999, the Company's
five largest customers accounted for 42.8% of the Company's net sales. Sales to
Toys "R" Us, Wal-Mart and Target,

-8-

the Company's three largest customers, aggregated 35.1% of the Company's net
sales during the same period. The Company expects to continue to rely on a
relatively small number of customers for a significant percentage of sales for
the foreseeable future. Because a large portion of the Company's sales are
concentrated in the Company's five largest customers and these customers
represent a significant share of the market for toy sales to consumers, the loss
of any one of them as a customer, or a significant reduction in sales to any one
of them, would have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Customers."

LIQUIDITY. Effective February 2, 1999, the Company entered into an
agreement with Sunrock Capital Corp. pursuant to which Sunrock provides a
revolving line of credit for up to $10 million (the "Revolver"). Borrowings
under the Revolver are utilized by the Company to finance accounts receivable,
inventory, and other operating and capital requirements. The Revolver matures
February 2, 2003 and contains covenants relating to the condition of the
Company. If the Company fails to maintain compliance with the financial
covenants contained in the Revolver, the maturity date will or can be
accelerated.

DEPENDENCE ON INDEPENDENT DESIGNERS, LICENSES AND OTHER PROPRIETARY
RIGHTS. For most of its proprietary products, the Company is dependent on
concepts, technologies and other intellectual property rights licensed from
third parties, such as rights to trademarks. For each of these proprietary
products and product lines, the Company typically enters into a license
agreement with the owner of the intellectual property to permit the Company to
use the intellectual property. These license agreements typically provide for
royalty payments by the Company to the licensor based on the net sales of the
product incorporating the licensed property. For fiscal 1999, net sales of
products developed and sold under the Company's license agreements accounted for
54% of the Company's net sales, including 22% of the Company's net sales
attributable to sales of products incorporating the Kawasaki(R) trademark. The
Company's existing license agreements generally have terms ranging from 2 to 30
years. The Company's license agreement with Kawasaki Motors Corp., USA was
extended in June 1998 for a four-year period, through December 31, 2002. There
can be no assurance that the Company will be able to procure new license
agreements, renew existing license agreements (on commercially reasonable terms,
or at all), or that existing license agreements will not be terminated. The
Company's license agreements may contain restrictions on products manufactured
and permitted sales territories, and may give the licensor the right to approve
the manufacturer to be utilized by the Company to produce the product. Certain
of the Company's license agreements are non-exclusive. Licenses that overlap the
Company's licenses with respect to products, geographic areas and markets have
been and may continue to be granted to competitors of the Company. See
"Business--License Agreements."

In addition to rights licensed from third parties, the Company also relies
on a combination of design patent, copyright, trademark and trade secret
protection and non-disclosure agreements with employees to establish and protect
the proprietary rights that the Company has in its products. There can be no
assurance that the Company's competitors will not independently develop or
acquire proprietary technologies that are substantially equivalent or superior
to those of the Company. There also can be no assurance that the measures
adopted by the Company to protect its proprietary rights will be adequate to do
so. The ability of the Company's competitors to develop or acquire technologies
or other proprietary rights equivalent or superior to those of the Company or
the inability of the Company to enforce its proprietary rights could have a
material adverse effect on the Company.

The Company does not believe that any of its products infringe on the
proprietary rights of third parties in any material respect. There can be no
assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. Any such claim, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements,

-9-

if required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the business, results of
operations and financial condition of the Company.

INVENTORY MANAGEMENT. Most of the Company's largest retail customers
utilize an inventory management system to track sales of products and rely on
reorders being rapidly filled by the Company and other suppliers rather than
maintaining large product inventories. These types of systems put pressure on
suppliers like the Company to promptly fill customer orders and also shift some
of the inventory risk from the retailer to suppliers. Production of excess
products by the Company to meet anticipated retailer demand could result in
price markdowns and increased inventory carrying costs for the Company.
Similarly, if the Company fails to predict consumer demand for a product, it may
not be able to deliver an adequate supply of products on a timely basis and
will, as a result, lose sales opportunities. See "Business--Distribution."

RETURNS AND MARKDOWNS. As is customary in the toy industry, the Company
historically has permitted certain customers to return slow-moving items for
credit and has allowed price reductions as to certain products then held by
retailers in inventory. The Company expects it will continue to be required to
make such accommodations in the future. Any significant increase in the amount
of returns or markdowns could have a material adverse effect on the Company's
financial condition and results of operations.

SEASONALITY AND QUARTERLY FLUCTUATIONS. The Company's sales are seasonal.
A substantial portion of net sales is made to retailers in anticipation of the
Christmas holiday season. During fiscal 1999, 79% of the Company's net sales
were made during the Company's second and third fiscal quarters (May through
October) in connection with retail sales for the Christmas holiday season.
Adverse business or economic conditions during these periods could adversely
affect results of operations for the full year. The Company's financial results
for a particular quarter may not be indicative of results for an entire year,
and the Company's revenues and/or expenses will vary from quarter to quarter.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."

RELIANCE ON MANUFACTURERS BASED IN HONG KONG AND CHINA, TRADE RELATIONS.
To date, most of the Company's products have been manufactured by Hong Kong
manufacturers at facilities located in the PRC. According to reports published
by the TMA, the PRC is the world's largest producer of toys. The Company does
not have any long-term contracts with its manufacturers. In the event of any
such disruption or other political or economic change in Hong Kong or the PRC
affecting the Company's business, the Company would be required to seek
alternate manufacturing sources. The Company currently does not have in place
plans or arrangements for securing alternate manufacturing sources in the event
that its present relationships with manufacturers prove impracticable to
maintain, and there can be no assurance that there would be sufficient
alternative facilities to meet the increased demand for production that would
likely result from a disruption of manufacturing operations in the PRC.
Furthermore, such a shift to alternate facilities would likely result in
increased manufacturing costs and could subject the Company's products to
increased duties, tariffs or other restrictions. During fiscal 1999, four
manufacturers accounted for approximately 56.7% of the Company's purchases of
products. The loss of any of these manufacturers, or a substantial interruption
of the Company's manufacturing arrangements with any of these manufacturers,
could cause a delay in production of the Company's products for delivery to its
customers and could have a material adverse effect on the Company. While the
Company believes that alternate manufacturers exist, there can be no assurance
that alternate arrangements could be provided in a timely manner or on terms
acceptable to the Company. See "Business--Manufacturing" and "Business--Tariffs
and Duties."

Currently, the PRC has MFN trade status. As such, most toys imported into
the United States from the PRC are not subject to import duties. Recently,
however, the United States and the PRC have at

-10-

times been at odds over trade policies. There can be no assurance that in the
future trade relations between the United States and the PRC will not
deteriorate or that the MFN status of the PRC will not be altered or revoked
such that, as a result, the United States would impose duties or other trade
sanctions that would affect the cost of toys imported from the PRC. Increases in
quotas, duties, tariffs or other changes or trade restrictions which may be
imposed in the future would have a material adverse effect on the Company's
financial condition, operating results or ability to import products. In
particular, the Company's costs would be increased if the PRC's MFN status is
revoked. The loss of MFN status for the PRC would result in substantial duties
on the cost of toy products manufactured in the PRC and imported into the United
States and would most likely adversely affect the Company's financial condition
and results of operations. The imposition of such duties could have a material
adverse effect on the Company. See "Business--Tariffs and Duties."

ACQUISITION RISKS. The Company may from time to time evaluate and pursue
acquisition opportunities on terms management considers favorable to the
Company. A successful acquisition involves an assessment of the business
condition and prospects of the acquisition target, which includes factors beyond
the Company's control. This assessment is necessarily inexact, and its accuracy
is inherently uncertain. In connection with such an assessment, the Company
performs a review it believes to be generally consistent with industry
practices. This review, however, will not reveal all existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
acquisition target to assess fully its deficiencies. There can be no assurance
that any such acquisition would be successful or that the operations of the
acquisition target could be successfully integrated with the Company's
operations. Any unsuccessful acquisition could have a material adverse effect on
the Company.

GENERAL RISKS OF FOREIGN OPERATIONS. Foreign operations are generally
subject to risks such as transportation delays and interruptions, political and
economic disruptions, the imposition of tariffs and import and export controls,
difficulties in staffing and managing, longer payment cycles, problems in
collecting accounts receivable, changes in governmental policies, restrictions
on the transfer of funds, currency fluctuations and potentially adverse tax
consequences. Although the Company to date has not experienced any material
adverse effects due to its foreign operations, there can be no assurance that
such events will not occur in the future. Any growth of the Company's
international operations will subject the Company to greater exposure to risks
of foreign operations. The occurrence of such an event, particularly one
affecting the Company's relations with its manufacturers in the PRC, would have
a material adverse effect on the Company.

PRODUCT SAFETY AND LIABILITY, REGULATION. Products that have been or may
be developed or sold by the Company may expose the Company to potential
liability from personal injury or property damage claims by end-users of such
products. The Company has never been and is not presently a defendant in any
product liability lawsuit; however, there can be no assurance that such a suit
will not be brought in the future against the Company. The Company currently
maintains product liability insurance coverage in the amount of $2.0 million per
occurrence, with a $5.0 million excess product liability policy. There can be no
assurance that the Company will be able to maintain such coverage or obtain
additional coverage on acceptable terms, or that such insurance will provide
adequate coverage against all potential claims. Moreover, even if the Company
maintains adequate insurance, any successful claim could materially and
adversely affect the reputation and prospects of the Company, as well as divert
management time. The CPSC has the authority under certain federal laws and
regulations to protect consumers from hazardous goods. The CPSC may exclude from
the market goods it determines are hazardous and may require a manufacturer to
repurchase such goods under certain circumstances. Some state, local and foreign
governments have similar laws and regulations. In the event that such laws or
regulations change or the Company is found in the future to have violated any
such law or regulation, the sale of the relevant product could be prohibited,
and the Company could be required to repurchase such products. See
"Business--Government and Industry Regulation."

-11-

COMPETITION. The toy industry is highly competitive. Many of the Company's
competitors have longer operating histories, broader product lines and greater
financial resources and advertising budgets than the Company. In addition, the
toy industry has nominal barriers to entry. Competition is based primarily on
the ability to design and develop new toys, procure licenses for popular
products, characters and trademarks, and successfully market products. Many of
the Company's competitors offer similar products or alternatives to the
Company's products. The Company's products compete with other products for
retail shelf space. There can be no assurance that shelf space in retail stores
will continue to be available to support the Company's existing products or any
expansion of the Company's products and product lines. There can be no assurance
that the Company will be able to continue to compete effectively in this
marketplace. See "Business--Competition."

CONTROL BY CURRENT MANAGEMENT. As of February 29, 2000, the directors and
officers of the Company are the beneficial owners of an aggregate of 6,063,832
shares of Common Stock (excluding exercisable Options and the shares underlying
same, and excluding 66,792 Holdback Shares subject to future issuance) and such
beneficial ownership constitutes 66.9% of the total outstanding Common Stock of
the Company.

POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock
has been and may continue to be highly volatile and has been and could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of new products by the Company or its competitors,
changes in financial estimates by securities analysts, or other events or
factors. In the event the Company's operating results are below the expectations
of public market analysts and investors in one or more future quarters, it is
likely that the price of the Company's Common Stock would be materially
adversely affected. General market fluctuations may adversely affect the market
price of the Company's Common Stock.

ITEM 2. PROPERTIES

The Company's principal executive offices and showroom and principal
warehouse are located in Houston, Texas, where the Company occupies
approximately 14,000 square feet of office and showroom space and 57,000 square
feet of dock-high warehouse space. The Company leases this space pursuant to two
leases that terminate on August 31, 2002. The combined base rental for these
leases is currently $28,723 per month ($4.85 per square foot on an annual
basis). One lease provides for an annual increase in rent based on projected
cost of living and tax escalation adjustments.

The Company occupies offices of Meritus in Fairfield, New Jersey, where
the Company utilizes approximately 7,460 square feet of office, design and
showroom space. The base rental for this facility is $3,948 per month ($6.35 per
square foot on an annual basis). This lease will terminate on September 30,
2001.

The Company leases a 5,148 square foot showroom in the Toy Center building
in New York City at 200 Fifth Avenue. This lease commenced on December 1, 1999
and will terminate on April 30, 2010. The base rental for this lease is $13,943
per month ($32.50 per square foot on an annual basis), subject to cost of living
and tax escalations. The facility is staffed only during toy shows and specially
scheduled customer showings.

The Company leases 12,877 square feet of office and showroom space in Hong
Kong under a lease that commenced on March 23, 2000, and terminates in March
2003. The base rental for the lease term is approximately $34,481 per month
based on currency exchange rates ($32.13 per square foot on an annual basis).
Through June 19, 2000, the Company will also continue to occupy the current
showroom in Hong Kong which was leased by Meritus. The base rental is $6,736 per
month based on currency exchange rates ($32.33 per square foot on an annual
basis).

-12-

The Company is also leasing 1,080 square feet of showroom space in the
World Trade Center Building in Dallas, Texas for a three-year term that expires
May 31, 2002. The base rental for this lease is currently $1,033 per month
($11.47 per square foot on an annual basis). In addition, the Company has
assumed Meritus' lease of a 720 square foot showroom in the World Trade Center
Building in Dallas. Commencing April 1, 2000, the base rental for this lease
will be $757.00 per month ($12.62 per square foot on an annual basis). This
lease will terminate on March 31, 2002.

The Company leases a small storage facility in Hong Kong. From time to
time, the Company rents public warehouse space in Houston to accommodate
fluctuating inventory needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings and claims incident
to the normal conduct of its business. The Company believes that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material adverse effect on its financial position or results of
operations. The Company maintains product liability and general liability
insurance in amounts it believes to be reasonable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal 1999.

-13-

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's Common Stock is traded on The Nasdaq Stock Market's SmallCap
Market under the symbol "DSIT." Prior to August 17, 1998, the Company's Common
Stock was traded on The Nasdaq National Market. The table sets forth, for the
periods indicated, the reported high and low close sale prices of the Company's
Common Stock as reported on The Nasdaq National Market and The Nasdaq SmallCap
Market:

HIGH LOW
------- -------
Fiscal Year 1998:
1st Quarter 2-7/8 1-5/8
2nd Quarter 2 15/16
3rd Quarter 1-3/4 13/16
4th Quarter 1-13/16 1-1/16
Fiscal Year 1999:
1st Quarter 3-1/2 1-5/8
2nd Quarter 4-7/16 2-21/32
3rd Quarter 4-11/32 3
4th Quarter 3-1/2 2-11/16

STOCKHOLDERS

According to the records of the Company's transfer agent, as of March 15,
2000, there were 90 holders of record of the Company's Common Stock. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.

DIVIDENDS AND DISTRIBUTIONS

The Company has never declared nor paid cash dividends on its Common Stock
and does not anticipate paying any cash dividends on its Common Stock in the
near future. In addition, the Company's credit facility prohibits the payment of
dividends.

MERITUS ACQUISITION

On January 7, 2000 the Company acquired Meritus, a privately held toy
manufacturer, by merger. The Company paid the Meritus shareholders $2.8 million
in cash and a note and at the closing of the merger issued 503,226 shares of the
Company's Common Stock (with an obligation to issue an additional 96,774 shares
of Common Stock upon satisfaction of certain post closing conditions and
covenants, 29,982 shares of which were issued by the Company on February 10,
2000) in exchange for all of the issued and outstanding stock of Meritus. The
merger of Meritus into the Company, including the issuance of Common Stock to
the Meritus shareholders, constituted a privately negotiated transaction between
the Company and Meritus and its shareholders. The issuance of Common Stock to
the Meritus shareholders was made in reliance on the exception from registration
set forth in Section 4(2) of the Securities Act of 1933, as amended. The Company
believes the Section 4(2) exemption from registration was available based upon
the established criteria for effecting a private offering by virtue of the
following facts, among others: (i) the Meritus shareholders had access to the
type of information that would be included in a registration statement and
conducted a comprehensive due diligence review in connection with the merger,
(ii) the Meritus shareholders have adequate financial means to bear the risk of
their investment in the Company and can be described as sophisticated, (iii)
Meritus had only two shareholders; accordingly there were only two offerees in
the transaction, (iv) the Meritus shareholders made representations that they
acquired the Common Stock for investment and not with a view toward
distribution, (v) the Common Stock issued by the Company to the

-14-

Meritus shareholders contains restrictions on its resale, and (vi) no
underwriters were involved nor were any underwriters' commissions paid in
connection with the transactions.

-15-

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for
the Company. The selected consolidated financial data were derived from the
Company's consolidated financial statements. All dollar amounts are stated in
thousands, except per share data:

The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this report.

December 31, January 31, January 31, January 31, January 31,
Statement of Operations Data: 1999 1999 1998 1997 1996
----------- ---------- ---------- ---------- ----------

Net sales .............................. $47,560 $52,723 $73,624 $63,219 $63,146
Income (loss) before income taxes and
extraordinary item ................... 2,150 (1,337) (7,392) 3,106 3,743
Income (loss) before extraordinary item 1,281 (1,004) (5,062) 1,886 2,294
Net income (loss) ...................... 1,281 (1,004) (5,543) 1,886 2,294

Basic earnings (loss) per share before
extraordinary item ................... $ .17 $ (.17) $ (.97) $ .54 $ .66
Basic earnings (loss) per share ........ $ .17 $ (.17) $ (1.06) $ .54 $ .66
Diluted earnings (loss) per share before
extraordinary item ................... $ .16 $ (.17) $ (.97) $ .50 $ .66
Diluted earnings (loss) per share ...... $ .16 $ (.17) $ (1.06) $ .50 $ .66

December 31, January 31, January 31, January 31, January 31,
Balance Sheet Data: 1999 1999 1998 1997 1996
----------- ---------- ----------- ---------- ----------
Working capital ........................ $ 6,326 $ 391 $ 6,265 $ 2,621 $ 3,510
Total assets ........................... 15,027 11,411 19,929 14,395 15,746
Long-term debt, including capital leases 2,393 2,541 7,495 14,203 18,188
Total liabilities ...................... 8,038 10,549 18,049 24,738 27,984
Shareholders' equity (deficit) ......... 6,989 861 1,880 (10,343) (12,238)

-16-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

The following discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere herein.

The Company designs, develops, markets and distributes a variety of toys
and children's consumer electronics. The Company's core product categories are
(i) juvenile audio products, including walkie-talkies, pre-school audio
products, pre-teen audio products and musical toys; (ii) girls' toys, including
dolls, play sets and accessories; and (iii) boys' toys, including radio
controlled vehicles, action figures and western and military action toys.
Historically, the majority of the Company's sales have been made to customers
based in the United States. All of the Company's international sales are
denominated in United States dollars. Therefore, the Company is not subject to
exchange rate risk with respect to international sales.

In December 1995, a series of transactions (the "Recapitalization") was
consummated whereby the Company repurchased 77.7% of the then outstanding Common
Stock from the then sole shareholder of the Company for $22.2 million and issued
2,719,000 shares of Common Stock to a group of new investors for $3.8 million.
The Recapitalization resulted in the incurrence of an aggregate of $17.9 million
of additional indebtedness. The stock purchased by the Company from its former
sole shareholder was held as treasury stock. On June 3, 1997, the Company
completed its initial public offering of 2,500,000 shares of its Common Stock,
which resulted in net proceeds to the Company of $17.7 million. All of the net
proceeds were used to repay debt of the Company.

On April 15, 1999, the Company entered into a Stock Purchase Agreement
with MVII. Pursuant to the Stock Purchase Agreement, MVII purchased from the
Company 566,038 shares of its Common Stock for $1.2 million on April 15, 1999,
and purchased an additional 1,792,453 shares of its Common Stock for $3.8
million on June 1, 1999. Also, pursuant to the Stock Purchase Agreement, on
April 21, 1999, MVII commenced a tender offer for 1.6 million shares of the
outstanding Common Stock at $4.38 per share net to the seller in cash. On May
26, 1999, MVII accepted for payment 1.6 million shares that were validly
tendered and not withdrawn in the Offer by the Company's shareholders. The Stock
Purchase Agreement and the transactions contemplated thereby were approved by
the Company's shareholders at the Annual Meeting of Shareholders held on May 24,
1999.

As a result of the transactions consummated pursuant to the Stock Purchase
Agreement, MVII has made a total investment in the Company's Common Stock of $12
million. Of that $12 million, $5 million was paid by MVII directly to the
Company for Common Stock. Following the transaction contemplated by the Stock
Purchase Agreement, MVII was the record owner of approximately 47% of the
Company's outstanding shares of Common Stock. When MVII's record ownership was
combined with MVII's rights under the Voting Agreement, MVII was the beneficial
owner of approximately 61% of the Company's outstanding shares of Common Stock.
The Voting Agreement also entitles MVII to nominate all but two of the members
of the Company's board of directors.

On July 1, 1999, the Company issued 100,000 shares of Common Stock to MVII
pursuant to a contingency contained in the Stock Purchase Agreement. During the
remainder of 1999, MVII purchased 63,646 shares of Common Stock from two former
executives of the Company and exercised its right of first refusal contained in
the Voting Agreement to purchase 72,101 shares of Common Stock from Conrad.
Following these transactions, MVII owns a record or beneficially 4,194,238
shares of the Company's Common Stock which, as of March 15, 2000, represents 46%
of the total Common Stock issued and outstanding. On December 17, 1999, Rust
Capital sold 291,421 shares of Common Stock to Martin . Martin purchased such
shares pursuant to MVII's right of first refusal contained in the Voting
Agreement, which was assigned by MVII to Martin on December 15, 1999.

-17-

As of January 7, 2000, the Company acquired Meritus, a privately held toy
manufacturer headquartered in Fairfield, New Jersey, with offices and
distribution facilities in Hong Kong. Pursuant to the terms of the merger the
Company acquired all of the issued and outstanding stock of Meritus for 600,000
shares of the Company's Common Stock and $2.8 million in other consideration
paid to the shareholders of Meritus. Contemporaneously with the merger, the
Company satisfied $4.4 million of Meritus' debt. Meritus manufactures and
markets dolls, doll houses, doll accessories, and girls' toys.

As a result of its merger with Meritus, the Company acquired three
wholly-owned Hong Kong subsidiaries; Meritus Industries Limited, RSP Products
Limited, and Elite Dolls Limited, which are engaged in the Company's doll
manufacturing operations. The Company is in the process of consolidating the
three newly-acquired subsidiaries with DSI(HK).

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has funded its operations and capital
requirements by cash generated from operations and borrowings. The Company's
primary capital needs have consisted of acquisitions of inventory, financing
accounts receivable and capital expenditures for product development.

The Company's operating activities used net cash of $4.2 million during
fiscal 1999, consisting primarily of increases in accounts receivable and
inventory and decreases in deferred income taxes and accounts payable and
accrued liabilities. Net cash used in investing activities during fiscal 1999
was $962,000 and was a result of capital expenditures partially offset by a
decrease in other assets. Net cash provided by financing activities was $5.1
million in 1999 and was a result of the issuance of common stock. The Company's
working capital at December 31, 1999 was $6.3 million, and unrestricted cash was
$479,000.

The seasonal nature of the toy business results in complex working capital
needs. The Company's working capital needs, which the Company generally
satisfies through short-term borrowings, are greatest in the first two fiscal
quarters. To manage these working capital requirements, the Company maintains a
line of credit facility (the "Hong Kong Credit Facility") with State Street Bank
and Trust Company, Hong Kong Branch, and the Revolver.

As a result of losses incurred in fiscal 1998, the Company was not in
compliance with certain of the covenants contained in its previous line of
credit with a commercial bank at January 31, 1999. However, on February 2, 1999,
the Company secured the Revolver. The terms of the Revolver include interest at
the bank's prime rate plus three quarters of one percent (.75%) and maturity at
February 2, 2003. The maximum loan limit remains at $10 million, subject to the
availability of sufficient, eligible inventory and accounts receivable.

The Company has budgeted approximately $1.6 million for capital
expenditures for fiscal 2000 consisting primarily of purchases of tools and
molds. Additionally, the Company's anticipated fiscal 2000 operating cash
requirements include a commitment of $500,000 to television advertising.

At March 15, 2000, the Company had borrowing capacity of an aggregate of
$338,500 under the Revolver and the Hong Kong Credit Facility. Based on
projected fiscal 2000 operating results, the Company believes that cash flows
from operations and the available borrowings under the Revolver and the Hong
Kong Credit Facility will be sufficient to meet the Company's operating cash
requirements and fund the Company's anticipated capital expenditures. However,
there can be no assurance that the Company will meet its projected operating
results, and accordingly, the Company is considering all of its financing
alternatives. In connection with any future cash needs or acquisition
opportunities, the Company may incur additional debt or issue additional equity
or debt securities depending on market conditions and other factors.

-18-

In connection with the Stock Purchase Agreement, the Company received $5
million in April and June of 1999. The Company used those funds to finance the
normal business operations of the Company.

On January 7, 2000, the Company acquired Meritus by means of a merger.
Pursuant to the terms of the merger, the Company acquired all of the issued and
outstanding stock of Meritus for 600,000 shares of the Company's Common Stock,
$1.1 million in cash and a note for $1.7 million paid to the shareholders of
Meritus. The note, bearing interest at 10.0375% per annum, requires quarterly
principal and interest payments beginning April 1,2000. Contemporaneously with
the merger, the Company satisfied $4.4 million of Meritus' debt.

In connection with the acquisition of Meritus, the Company borrowed $5
million from MVII. The debt is evidenced by a promissory note dated January 7,
2000. The note bears interest at a rate of prime plus 2%, matures on July 1,
2004 and is subordinate to the Revolver. The proceeds from the note were used
primarily to facilitate the merger, including the satisfaction of Meritus' debt,
described above.

The Company is obligated to make future minimum royalty payments under
certain of its license agreements. As of December 31, 1999, the Company was
required to make an aggregate of approximately $297,000 in payments of
guaranteed royalties under certain licenses in fiscal 1999 and $408,000
thereafter through fiscal 2002.

As part of the Company's strategy, the Company will evaluate potential
acquisitions of other toy businesses or product lines that the Company believes
would complement its existing business. The Company has no present understanding
or agreement with respect to any acquisition.

RESULTS OF OPERATIONS

The following table sets forth the Company's results of operations as a
percentage of net sales for the fiscal years indicated:

1999 1998 1997
----- ----- -----
Net sales ..................................... 100.0% 100.0% 100.0%
Cost of goods sold ............................ 71.6 79.8 75.1
----- ----- -----
Gross profit .................................. 28.4 20.2 24.9
Selling, general and administrative expenses .. 22.8 21.3 33.4
----- ----- -----
Operating income (loss) ....................... 5.6 (1.1) (8.5)
Interest expense .............................. 1.3 1.6 1.8
Other income .................................. (0.2) (0.2) (0.3)
----- ----- -----
Income (loss) before income taxes and
extraordinary item .......................... 4.5 (2.5) (10.0)
Provision for (benefit from) income taxes ..... 1.8 (0.6) (3.1)
----- ----- -----
Income (loss) before extraordinary item ....... 2.7 (1.9) (6.9)
Extraordinary item (net of tax) ............... 0.0 0.0 (0.6)
----- ----- -----
Net income (loss) ............................. 2.7 (1.9) (7.5)
===== ===== =====

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

All component changes are affected by the change in the Company's fiscal
year in 1999 (fiscal 1999 reflects 11 months activity versus 12 months activity
in fiscal 1998).

NET SALES. Net sales during fiscal 1999 decreased $5.1 million, or 9.8%,
to $47.6 million, from $52.7 million in fiscal 1998.

Net sales of juvenile audio products decreased $9.2 million, or 24.2%, to
$29.1 million during fiscal 1999, from $38.3 million during fiscal 1998. The
decrease was primarily attributable to a successful but slower than expected
transition between the Company's old walkie-talkie line and the new TECH-LINK(R)
brand. Net sales of boys' toys increased $1.3 million, or 17.1% to $8.9 million
during fiscal 1999 from $7.6 million in fiscal 1998. The increase reflects the
continued increase in demand for

-19-

BLOCKMEN(R) construction sets, partially offset by a decline in sales of
radio-controlled products. Net sales of girls' toys increased $3.9 million, or
121%, to $7.0 million in fiscal 1999 from $3.1 million in fiscal 1998. Sales for
1999 were driven by the introduction of the national magazine promoted SWEET
FAITH(TM) doll and tesT market targeted HUSH LI'L BABY(TM) doll. Sales for
fiscal 1998 were comprised principally of sales of one new non-promoted (BABY
LEARNS TO WALK(TM)) doll and final closeouts of 1997 doll inventory. Net sales
of products in other categories decreased $1.1 million or 29.0% to $2.6 million
during fiscal 1999 from $3.7 million in fiscal 1998. The decrease reflects
continued reduction in sales of HOPPIN' POPPIN' SPACEBALLS(R), an action game
that was TV promoted in fiscal 1997, and a decrease in pre-school products,
partially offset by an increase in sales of the TALKING DOORBELL(R) products
introduced in fiscal 1998.

International net sales decreased $200,000, or 1.8%, to $10.9 million
during fiscal 1999 from $10.7 million in fiscal 1998. International net sales
were 22.9% of total net sales for fiscal 1999 as compared to 21.0% of total net
sales in fiscal 1998.

GROSS PROFIT. Gross profit increased $2.8 million or 26.0% to $13.5
million during fiscal 1999 from $10.7 million in fiscal 1998. Gross profit as a
percentage of net sales increased to 28.4% during fiscal 1999 from 20.2% in
fiscal 1998. The increase reflects the strategic implementation of proprietary
products such as SWEET FAITH(TM) dolls and BLOCKMEN(R) construction sets, and
the successful branding of our TECH-LINK(R) walkie-talkie lines; these types of
items have a higher gross margin and comprise a larger percentage of our total
sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $400,000 to $10.8 million, or 3.4% during
fiscal 1999 from $11.2 million in fiscal 1998. The decrease is primarily related
to decreased expenditures for salaries and travel and entertainment due to the
change in the Company's fiscal year.

INTEREST EXPENSE. As a result of lower prime interest rates and reduced
borrowing activity, interest expense decreased $256,000, or 29.3%, to $619,000
in fiscal 1999 from $875,000 during fiscal 1998.

OTHER INCOME. Other income decreased $4,000 or 3.3%, to $103,000 during
fiscal 1999 from $107,000 during fiscal 1998. The negative effects of foreign
currency translation contributed to the decrease.

INCOME TAXES. In fiscal 1999, the Company generated a profit before income
taxes of $2.1 million compared to a $1.3 million loss before income taxes during
fiscal 1998. As a result, the Company incurred tax expense of $869,000 during
fiscal 1999 compared to a tax benefit of $333,000 in fiscal 1998. Tax expense
during fiscal 1999 was also impacted by the expiration of $154,000 in foreign
tax credits.

NET INCOME (LOSS). As a result of the foregoing factors, the Company's net
income for fiscal year 1999 was $1.3 million, compared to a net loss of $1.0
million for fiscal 1998.

FISCAL YEAR 1998 COMPARED TO FISCAL 1997

NET SALES. Net sales for fiscal 1998 decreased $20.9 million, or 28.4%, to
$52.7 million, from $73.6 million for fiscal 1997.

Net sales of juvenile audio products increased $1.3 million, or 3.5%, to
$38.3 million during fiscal 1998, from $37.0 million during fiscal 1997. The
increase was primarily attributable to continued strength in walkie-talkies and
musical keyboards, partially offset by a decline in pre-school audio products.
Net sales of girls' toys decreased $19.7 million, or 86.5%, to $3.1 million
during fiscal 1998,

-20-

from $22.8 million during fiscal 1997. Sales for fiscal 1997 were driven
principally by the TV promotion of three dolls (BABY PICK ME UP(R), DREAMIE
SWEETS(R) and ROSIE(R)). Sales for 1998 were comprised principally of sales of
one new non-promoted (BABY LEARNS TO WALK(TM)) doll and final closeouts of 1997
doll inventory. NeT sales of boys' toys increased $392,000, or 5.4%, to $7.6
million during fiscal 1998 from $7.2 million during fiscal 1997. This increase
was attributable to the introduction of the BLOCKMEN(R) construction sets and
the new radio-controlled "BURNIN' THUNDER"(TM) car, partially offset by a
decrease in sales of the radio-controlled KAWASAKI(R) NINJA(R) motorcycle. Net
sales of products in other categories decreased $2.9 million, or 43.4%, to $3.7
million during fiscal 1998, from $6.6 million during fiscal 1997. The decrease
was due primarily to decreased sales of handheld electronic games and HOPPIN'
POPPIN' SPACEBALLS(R), an action game that was TV promoted in 1997.

International net sales decreased $3.2 million, or 22.3%, to $11.1 million
during fiscal 1998 from $14.3 million in fiscal 1997. The decline was due
primarily to decreased sales of TV promotable items, principally dolls.
International net sales were 21.0% of total sales for fiscal 1998 as compared to
19.4% of total sales in fiscal 1997.

GROSS PROFIT. Gross profit decreased $7.6 million, or 41.9%, to $10.7
million during fiscal 1998 from $18.3 million in fiscal 1997. Gross profit as a
percentage of net sales decreased to 20.2% during fiscal 1998 from 24.9% in
fiscal 1997. Such decrease was primarily due to decreased sales of TV promoted
toys, principally dolls, which generally have higher gross margins to cover the
related costs of TV advertising.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $13.4 million, or 54.3%, to $11.2 million
during fiscal 1998 from $24.6 million in fiscal 1997. The decrease resulted
primarily from decreased TV advertising expenses during fiscal 1998.

INTEREST EXPENSE. As a result of debt repayment using the proceeds from
the Company's initial public offering in June 1997, interest expense decreased
$485,000, or 35.7%, to $875,000 during fiscal 1998 from $1.4 million in fiscal
1997.

OTHER INCOME. Other income decreased $125,000, or 53.9%, to $107,000
during fiscal 1998 from $232,000 during fiscal 1997. In 1997, the Company
received interest income related to certain insurance proceeds. The effects of
foreign currency translations also contributed to the decrease.

EXTRAORDINARY ITEM. As a result of debt repayment using the net proceeds
of the Company's initial public offering, $481,000 of debt issuance cost (net of
tax) was written off in fiscal 1997.

INCOME TAXES. In fiscal 1998, the Company incurred a loss before income
taxes and extraordinary items of $1.3 million, which resulted in a benefit from
income taxes of $333,000 compared to a $2.3 million benefit from income taxes
during fiscal 1997.

NET INCOME (LOSS). As a result of the foregoing factors, the Company's net
loss for fiscal year 1998 was $1.0 million compared to a net loss of $5.5
million for fiscal 1997.

SEASONALITY

The toy industry is very seasonal with the Christmas holiday season
representing over two-thirds of total annual retail toy sales. The Company has
experienced this seasonal pattern in its net sales. To accommodate this peak
selling season, holiday toy lines are introduced early in the first calendar
quarter. Retailers generally commit to their holiday season purchases during the
first two calendar quarters and those orders are generally shipped to the
retailers' distribution centers on a scheduled basis from May through October.
During fiscal 1999, 79.2% of the Company's net sales were made during the
Company's second and third fiscal quarters (May through October), generally in
connection with retail sales for the Christmas holiday season. As a result of
the seasonality of the Company's business, the

-21-

Company expects that it will incur a loss in the first quarter and fourth
quarter of each fiscal year even in years in which the Company is profitable for
the year.

INFLATION

The Company does not believe that inflation in the United States or Europe
in recent years has had a significant effect on its results of operations.

YEAR 2000

The Company performed a review of its computer systems and operations for
vulnerability to Year 2000 ("Y2K") issues. The situations occur because many
computer systems and programs existing prior to January 1, 2000 process
transactions using two digits rather than four digits for the year of a
transaction. Unless modified, a year "2000" transaction might be processed as
the year "1900," potentially causing systems or programs to fail or create
erroneous results.

The Company completed the review of its management information software
("MIS"), EDI software, and local area network and personal computer operating
systems prior to January 1, 2000 to determine their system's Y2K compliance
status. This review included communications with suppliers, contractors and
customers to evaluate their Y2K compliance, including EDI software evaluation.
Based on those received to date, no response has indicated that our key
customers, contractors and suppliers were not Y2K compliant. These
communications also indicated that major customers tested their EDI systems for
internal, intermediary and supplier Y2K compliance, and found them to be Y2K
compliant. The effect of non-compliance by independent manufacturers and other
third parties was not determinable.

The MIS systems, including the local area network and computer hardware at
the Company's U.S. headquarters and Hong Kong subsidiary, were tested, and
upgraded or replaced as necessary to be fully Y2K compliant. The Company
incurred expense of approximately $90,000 through December 31, 1999 in making
its computer systems and programs Y2K compliant. These costs were funded from
existing cash and cash flow from operations. Any additional charges are expected
to be minimal.

To date, the Company has not experienced any Y2K issues with its internal
operating systems or with its customers or suppliers. In addition, the Company
did not experience any loss in revenues due to the Y2K issues. Although
unlikely, there can be no assurance future unforeseen Y2K issues will not occur.
The Company does not believe, however, that there will be any material impact on
the Company's operation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Index to Consolidated Financial Statements and Schedules" included on
page F-1 for information required under this Item 8.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

-22-

PART III

Information required by Items 10 through 13 is hereby incorporated by
reference to the captions "Principal Shareholders," "Election of Directors,"
"Management," and "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
anticipated to be filed within 120 days after the end of the Company's fiscal
year ended December 31, 1999.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K

(a) 1. Financial Statements. Reference is made to the Index on
page F-1 for a list of all financial statements filed as part
of this Report.

(a) 2. and (d) Financial Statement Schedules. Reference is made to
the Index on page F-1 for a list of all financial statement
schedules filed as part of this Report.

(a) 3. and (c) Exhibits. Reference is made to the Exhibit Index on
page E-1 for a list of all exhibits filed as part of this
Report.

(b) Reports on Form 8-K.

A current report on Form 8-K was filed on November 23, 1999,
reporting a non-cash restatement of the Company's financial
results for its fiscal years ended January 31, 1996, 1997,
1998 and 1999 and subsequent quarterly periods in 1999, and
including the Company's Consolidated Statement of Operations -
Restated and Consolidated Balance Sheet - Restated.

-23-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DSI Toys, Inc.

Dated: March 30, 2000 By: /s/ MICHAEL J. LYDEN
--------------------------------------------------
Michael J. Lyden
President and Chief Executive Officer

Dated: March 30, 2000 By: /s/ ROBERT L. WEISGARBER
--------------------------------------------------
Robert L. Weisgarber
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ E. THOMAS MARTIN Chairman March 30, 2000
- --------------------------
E. Thomas Martin

/s/ M.D. DAVIS Director March 30, 2000
- --------------------------
M.D. Davis

/s/ JOSEPH S. WHITAKER Director March 30, 2000
- --------------------------
Joseph S. Whitaker

/s/ JOSEPH N. MATLOCK Director March 30, 2000
- --------------------------
Joseph N. Matlock

/s/ ROBERT L. BURKE Director March 30, 2000
- --------------------------
Robert L. Burke

/s/ JOHN MCSORLEY Director March 30, 2000
- --------------------------
John McSorley

/s/ WALTER S. REILING Director March 30, 2000
- --------------------------
Walter S. Reiling

-24-

DSI TOYS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

PAGE

FINANCIAL STATEMENTS

Report of Independent Accountants F-2

Consolidated Balance Sheet at December 31, 1999 and January 31, 1999 F-3

Consolidated Statement of Operations for fiscal years 1999, 1998 and 1997 F-4

Consolidated Statement of Cash Flows for fiscal years 1999, 1998 and 1997 F-5

Consolidated Statement of Shareholders' Equity for fiscal years 1999,
1998, and 1997 F-6

Notes to Consolidated Financial Statements F-7

SCHEDULES

II. Valuation and Qualifying Accounts and Reserves S-1

All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
DSI Toys, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of DSI
Toys, Inc. and its subsidiary (the Company) at December 31, 1999 and January 31,
1999, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

Houston, Texas
February 11, 2000

F-2

DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET

DECEMBER 31, JANUARY 31,
1999 1999
------------ ------------

ASSETS

Current Assets:
Cash .................................... $ 478,970 $ 554,197
Restricted cash ......................... 150,000 150,000
Accounts receivable, net ................ 3,408,059 1,069,725
Inventories ............................. 5,695,240 4,207,704
Prepaid expenses and other current assets 1,383,644 913,970
Deferred income taxes ................... 314,000 801,000
------------ ------------
Total current assets ............... 11,429,913 7,696,596

Property and equipment, net .................. 2,000,215 1,642,672
Deferred income taxes ........................ 902,000 1,117,000
Other assets ................................. 695,237 954,511
------------ ------------
$ 15,027,365 $ 11,410,779
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 3,769,286 $ 6,799,290
Current portion of long-term debt ....... 1,313,787 824,675
Income taxes payable .................... 428,727 271,920
------------ ------------
Total current liabilities .......... 5,511,800 7,895,885
Long-term debt ............................... 2,393,236 2,540,522
Deferred income taxes ........................ 133,340 113,000
------------ ------------
Total liabilities .................. 8,038,376 10,549,407
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued or outstanding
Common stock, $.01 par value, 35,000,000
and 20,000,000 shares authorized,
8,719,000 shares issued, 8,533,157
and 6,000,000 shares outstanding .. 87,190 87,190
Additional paid-in capital .............. 4,934,919 21,162,568
Common stock warrants ................... 102,500 102,500
Accumulated other comprehensive income
(loss) ............................ (12,626) 14,296
Retained earnings ....................... 3,436,401 2,155,410
------------ ------------
8,548,384 23,521,964
Less: treasury stock, 185,843 and
2,719,000 shares, at cost ......... (1,559,395) (22,660,592)
------------ ------------
Total shareholders' equity .... 6,988,989 861,372
------------ ------------
$ 15,027,365 $ 11,410,779
============ ============

See accompanying notes to consolidated financial statements.

F-3

DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS

----------------------------------------------
FISCAL YEAR
----------------------------------------------
1999 1998 1997
------------ ------------ ------------

Net Sales .................... $ 47,560,024 $ 52,722,517 $ 73,624,398
Cost of goods sold ........... 34,046,112 42,058,919 55,285,501
------------ ------------ ------------
Gross profit ................. 13,513,912 10,663,598 18,338,897
Selling, general and
administrative expenses ...... 10,848,624 11,232,414 24,602,478
------------ ------------ ------------
Operating income (loss) ...... 2,665,288 (568,816) (6,263,581)
Interest expense ............. 618,994 874,907 1,360,067
Other income ................. (103,302) (106,881) (231,968)
------------ ------------ ------------
Income (loss) before income
taxes ...................... 2,149,596 (1,336,842) (7,391,680)
Provision for (benefit from)
income taxes ............... 868,605 (333,000) (2,329,323)
Extraordinary item ........... (480,754)
------------ ------------ ------------
Net income (loss) ............ $ 1,280,991 $ (1,003,842) $ (5,543,111)
============ ============ ============

BASIC EARNINGS PER SHARE
- ------------------------
Earnings (loss) per share
before Extraordinary
item .................. $ 0.17 $ (0.17) $ (0.97)
Extraordinary item ...... (0.09)
Earnings (loss) per share $ 0.17 $ (0.17) $ (1.06)
============ ============ ============

Weighted average shares
outstanding ........... 7,688,964 6,000,000 5,205,479
============ ============ ============

DILUTED EARNINGS PER SHARE
- --------------------------
Earnings (loss) per share
before Extraordinary
item ................. $ 0.16 $ (0.17) $ (0.97)
Extraordinary item ...... (0.09)

Earnings (loss) per share $ 0.16 $ (0.17) $ (1.06)
============ ============ ============

Weighted average shares
outstanding ........... 7,803,403 6,000,000 5,205,479
============ ============ ============

See accompanying notes to consolidated financial statements.

F-4

DSI TOYS, INC
CONSOLIDATED STATEMENT OF CASH FLOWS

--------------------------------------------
FISCAL YEAR
--------------------------------------------
1999 1998 1997
------------ ------------ ------------

Cash flows from operating activities:
Net income (loss) ............................................. $ 1,280,991 $ (1,003,842) $ (5,543,111)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation ......................................... 728,951 570,779 661,517
Loss on early retirement of debt ..................... 480,754
Amortization and write-off of
debt discount and issuance costs .................. 36,799 199,152
Provision for doubtful accounts ...................... 65,528 (17,424) 145,096
Loss (gain) on sale of equipment ..................... 727 200 (3,865)
Deferred income taxes ................................ 722,340 11,000 (2,781,000)
Changes in assets and liabilities:
Accounts receivable ............................... (2,403,862) 6,955,987 (4,921,595)
Due from shareholder .............................. 151,667
Inventories ....................................... (1,487,536) 2,229,714 (1,822,331)
Income taxes receivable/payable ................... 156,807 805,554 (726,845)
Prepaid expenses .................................. (287,174) (609,266) 567,486
Accounts payable and accrued liabilities .......... (3,030,004) (2,940,911) 3,481,100
------------ ------------ ------------
Net cash provided (used) by operating activities (4,216,433) 6,001,791 (10,111,975)

Cash flows from investing activities:
Capital expenditures .................................... (1,087,446) (961,304) (726,691)
Proceeds from sale of equipment ......................... 225 225 6,965
Repayments by shareholder ............................... 511,764
Decrease (increase) in other assets ..................... 125,408 (104,728) 313,085
------------ ------------ ------------
Net cash provided (used) in investing activities (961,813) (1,065,807) 105,123

Cash flows from financing activities:
Net borrowing (repayments) under revolving lines of
credit ............................................ 329,085 (4,730,655) 4,551,304
Net borrowings (repayments) on long-term debt ........... 12,741 15,069 (13,429,418)
Net proceeds from issuance of common stock .............. 4,873,548 17,744,475
Proceeds from issuance of warrants ...................... 2,500
Debt and stock issue costs .............................. (85,433) (35,000)
------------ ------------ ------------
Net cash provided (used) by financing activities 5,129,941 (4,750,586) 8,868,861
Effect of exchange rate changes on cash ....................... (26,922) (14,891) 19,689
------------ ------------ ------------
Net increase (decrease) in cash ............................... (75,227) 170,507 (1,118,302)
Cash and cash equivalents, beginning of year .................. 554,197 383,690 1,501,992
------------ ------------ ------------
Cash and cash equivalents, end of year ........................ $ 478,970 $ 554,197 $ 383,690
============ ============ ============

See accompanying notes to consolidated financial statements.

F-5

DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT CAPITAL WARRANTS INCOME
------------ ------------ ------------ ------------ ------------

Balance, Jan. 31, 1997 .. 6,219,000 $ 62,190 $ 3,443,093 $ 100,000 $ 9,498
Comprehensive loss:
Net loss ..............
Foreign currency
translation adjustments
net of tax ........... 19,689

Comprehensive loss......
Issuance of common
stock ................. 2,500,000 25,000 18,475,000
Stock issuance cost .... (755,525)
Warrants issued ........ 2,500
------------ ------------ ------------ ------------ ------------
Balance, Jan. 31, 1998 .. 8,719,000 87,190 21,162,568 102,500 29,187
Comprehensive loss:
Net loss ..............
Foreign currency
translation adjustments
net of tax ........... (14,891)

Comprehensive loss......
------------ ------------ ------------ ------------ ------------
Balance, Jan. 31, 1999 .. 8,719,000 87,190 21,162,568 102,500 14,296
Comprehensive income:
Net income ............
Foreign currency
translation adjustments
net of tax ........... (26,922)

Comprehensive income....
Issuance 2,458,491
Common shares from
the treasury .......... (15,479,229)
Options exercised ...... (518,189)
Stock issuance cost .... (230,231)
------------ ------------ ------------ ------------ ------------
Balance, Dec. 31, 1999 .. 8,719,000 $ 87,190 $ 4,934,919 $ 102,500 $ (12,626)
============ ============ ============ ============ ============

RETAINED TREASURY
EARNINGS STOCK TOTALS
------------ ------------ ------------
Balance, Jan. 31, 1997 .. $ 8,702,363 $(22,660,592) $(10,343,448)
Comprehensive loss:
Net loss .............. (5,543,111) (5,543,111)
Foreign currency
translation adjustments
net of tax ........... 19,689
------------
Comprehensive loss...... (5,523,422)
Issuance of common
stock ................. 18,500,000
Stock issuance cost .... (755,525)
Warrants issued ........ 2,500
------------ ------------ ------------
Balance, Jan. 31, 1998 .. 3,159,252 (22,660,592) 1,880,105
Comprehensive loss:
Net loss .............. (1,003,842) (1,003,842)
Foreign currency
translation adjustments
net of tax ........... (14,891)
------------
Comprehensive loss...... (1,018,733)
------------ ------------ ------------
Balance, Jan. 31, 1999 .. 2,155,410 (22,660,592) 861,372
Comprehensive income:
Net income ............ 1,280,991 1,280,991
Foreign currency
translation adjustments
net of tax ........... (26,922)
------------
Comprehensive income.... 1,254,069
Issuance 566,038
Common shares from
the treasury .......... 20,479,229 5,000,000
Options exercised ...... 621,968 103,779
Stock issuance cost .... (230,231)
------------ ------------ ------------
Balance, Dec. 31, 1999 .. $ 3,436,401 $ (1,559,395) $ 6,988,989
============ ============ ============

See accompanying notes to consolidated financial statements

`
F-6

DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION:

DSI Toys, Inc. (the "Company") was incorporated under the laws of the
State of Texas in November 1970. The Company markets and distributes a variety
of toys and children's consumer electronics both within the United States and
internationally, primarily to retailers. The Company's products are manufactured
primarily in the People's Republic of China.

Effective May 1, 1997, the Company's Articles of Incorporation were
amended to (i) authorize the issuance of 5,000,000 shares of $.01 par value
preferred stock, (ii) change the par value of common stock to $.01 and (iii)
reduce the authorized shares of common stock to 20,000,000 shares.

On June 3, 1997, the Company completed its initial public offering (the
"Offering") of 2,500,000 shares of common stock, which provided the Company net
proceeds of $17.7 million. All of the net proceeds were used to repay debt of
the Company. In connection with the Offering, the Company issued warrants to
purchase 250,000 shares of common stock to the lead underwriters. Such warrants
are exercisable at $10.80 per share and expire May 28, 2002.

Effective May 28, 1999, the Company's Articles of Incorporation were amended
to increase the authorized shares of common stock to 35,000,000 shares.

Effective June 1, 1999, the Company consummated transactions with MVII, LLC
("MVII") pursuant to a Stock Purchase and Sale Agreement dated April 15, 1999.
As a result of those transactions MVII made a total investment of $12 million in
the Company's common stock, $5 million of which was paid directly to the Company
for the purchase of 2,458,491 shares of common stock.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
DSI(HK) Ltd., a wholly owned subsidiary. All significant intercompany
transactions have been eliminated in consolidation.

FISCAL YEAR

The terms "fiscal year" and "fiscal" refer to the Company's fiscal year which
is the year ending January 31 of the following calendar year mentioned (e.g., a
reference to fiscal 1998 is a reference to the fiscal year ended January 31,
1999). Effective December 31, 1999, the Company changed its fiscal year end from
January 31 to a calendar year end.

CASH EQUIVALENTS

The Company considers investments with original maturity dates of three
months or less from the date of purchase to be cash equivalents. Restricted cash
held as a compensating balance under a revolving loan supported by letters of
credit is not considered a cash equivalent.

REVENUE RECOGNITION

Revenues are recognized upon shipment of product by the Company, or in the
case of FOB Asia sales, by the manufacturer, and, at that point, legal
responsibility and title pass to the buyer. The Company provides an allowance
for doubtful accounts and accrues for returns and discounts using a percentage
of gross sales based on historical experience. Provision is made currently for
estimated returns of defective and slow-moving merchandise, price protection and
customer allowances and is included as a reduction of accounts receivable.

INVENTORIES

Inventories consist of finished goods and supplies and are stated at the
lower of cost or market, with cost determined on a first-in, first-out basis. In
the fiscal year ended December 31, 1999, the Company recorded a $100,000
writedown of inventory.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Maintenance and repairs are
charged to operations, and replacements or betterments are capitalized. Property
or equipment sold, retired, or otherwise disposed of is removed from the
accounts, and any gains or losses thereon are included in operations.
Depreciation is recorded over the estimated useful lives of the related assets
using the straight-line method for molds and leasehold improvements and an
accelerated method for all other assets.

F-7

DEBT ISSUANCE COSTS AND DEBT DISCOUNT

Debt issuance costs and debt discount are amortized over the term of the
related debt on a straight-line basis. As a result of the debt repayment using
the proceeds of the Offering, in 1997 the Company recorded an extraordinary
charge of $481,000 (net of tax of $270,000) related to the write-off of
unamortized debt issuance and discount costs associated with the retired debt.

ADVERTISING

The cost of producing media advertising is capitalized as incurred and
expensed in the period in which the advertisement is first shown. During interim
periods, media communications costs are accrued in relation to sales when the
advertising is clearly implicit in the related sales arrangement. In any event,
all media communication costs are expensed in the fiscal year incurred. All
other advertising costs are expensed in the period incurred. Television
advertising expense totaled $275,000, $141,000 and $13.5 million during fiscal
1999, 1998 and 1997, respectively. At December 31, 1999, prepaid television
advertising production costs of $108,000 are included in prepaid expenses. There
were no such costs included in prepaid expenses at January 31, 1999. In fiscal
1999, the Company entered into advertising barter transactions in which the
Company recorded $311,000 in advertising expenses. Management believes this
amount approximates fair value.

INCOME TAXES

The Company accounts for deferred income taxes using the liability method
which provides for the recognition of deferred tax assets and liabilities based
upon temporary differences between the tax basis of assets and liabilities and
their carrying value for financial reporting purposes. Deferred tax expense or
benefit is the result of changes in deferred tax assets and liabilities during
the period. In estimating future tax consequences, all expected future events
are considered other than enactments of changes in the tax law or rates.

Deferred income taxes are provided on the undistributed earnings of DSI(HK)
Ltd.

FOREIGN CURRENCY TRANSLATIONS

The Company's foreign subsidiary uses the local currency as the functional
currency. Accordingly, assets and liabilities of the Company's foreign
subsidiary are translated using the exchange rate in effect at the balance sheet
date, while income and expenses are translated using average rates. Translation
adjustments are reported as a separate component of shareholders' equity.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt. Due
to their short maturity, the fair value of cash and cash equivalents, accounts
receivable and accounts payable approximates carrying value. The fair value of
the Company's debt approximates the carrying amount of the debt as it is at
variable market rates.

CONCENTRATION OF CREDIT RISK AND EXPORT SALES

Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables. The Company sells its
products principally to retail discount stores and toy stores. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base and their geographic
dispersion. The Company performs ongoing credit evaluations of its customers to
minimize credit risk, and for the majority of its FOB Asia sales, the Company
obtains letters of credit from its customers supporting the accounts receivable.
(See Note 12).

USE OF ESTIMATES

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Because of the inherent uncertainties in their process,
actual results could differ from such estimates. Management believes that the
estimates are reasonable.

F-8

IMPAIRMENT OF ASSETS

The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. The Company has not identified any
such impairment losses.

EARNINGS PER SHARE

Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128) requires the Company to report both basic earnings per share, which
is based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number of
common shares as well as all dilutive potential common shares outstanding.

Stock options and warrants are the only potentially dilutive shares the
Company has outstanding at December 31, 1999. During fiscal 1999, the Company's
warrants, for which the exercise price was greater than the average market price
of the common shares, were included in the computation of diluted earnings per
share, increasing the weighted average number of shares outstanding by 114,439
shares. The Company's remaining 996,500 shares of common stock options and
warrants were not included in the calculation because the options and warrants
would have been anti-dilutive. During fiscal 1998 and 1997, the Company had
1,241,888, and 1,171,888 shares, respectively, of common stock options and
warrants outstanding which were not included in the diluted earnings per share
calculation because the options and warrants would have been anti-dilutive.

STOCK-BASED COMPENSATION PLANS

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its plans and the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) in disclosures regarding the plan.

COMPREHENSIVE INCOME

In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes
new rules for the reporting and presentation of comprehensive income and its
components in a full set of financial statements. The Company's comprehensive
income is comprised of net income and foreign currency translation adjustments.
The adoption of SFAS 130 had no impact on the Company's net income or total
shareholders' equity. Prior to the adoption of SFAS 130, foreign currency
translation adjustments were reported separately in the statement of
shareholders' equity. The comprehensive income amounts in the prior fiscal
years' financial statements have been reclassified to conform to SFAS 130.

SEGMENT INFORMATION

In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS 131 did not affect the Company's results
of operations or financial position but did affect the disclosures of segment
information (see Note 12).

F-9

NOTE 3 - ACCOUNTS RECEIVABLE:

Accounts receivable consist of the following:

DECEMBER 31, 1999 JANUARY 31, 1999
------------------ ------------------
Trade receivables ................... $ 5,405,587 $ 2,984,619
Provisions for:
Discounts and markdowns ........... (728,910) (1,383,808)
Return of defective goods ......... (1,082,408) (407,628)
Doubtful accounts ................. (186,210) (123,458)
----------- -----------
Accounts receivable, net ............ $ 3,408,059 $ 1,069,725
=========== ===========

NOTE 4 - PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

DECEMBER 31, JANUARY 31,
ESTIMATED USEFUL LIVES 1999 1999
---------------------- ------------ ------------

Molds 3 years $ 3,795,738 $ 2,978,822
Equipment, furniture and fixtures 5-7 years 1,899,383 1,647,244
Leasehold improvements 10 years or lease term 1,008,481 997,420
Automobiles 3-5 years 84,246 84,190
------------ ------------
6,787,848 5,707,676
Less: accumulated depreciation 4,787,633 4,065,004
------------ ------------
$ 2,000,215 $ 1,642,672
============ ============

NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

Accounts payable and accrued liabilities consist of the following:

DECEMBER 31, 1999 JANUARY 31, 1999
----------------- ----------------

Trade payables .......................... $1,299,732 $4,388,808
Accrued royalties ....................... 1,164,079 776,590
Accrued compensation and commissions .... 521,836 973,441
Other ................................... 783,639 660,451
---------- ----------
$3,769,286 $6,799,290
========== ==========

F-10

NOTE 6 - NOTES PAYABLE:

Indebtedness consists of the following:

DECEMBER 31, JANUARY 31,
1999 1999
---------------- ---------------

Bank revolving line of credit for $10 million
with a commercial bank collateralized by all
of the Company's U.S. accounts receivable,
intangibles, equipment, fixtures, and inventory
and 65% of the common stock of DSI(HK) Ltd.,
principal due on February 2, 2003; interest at
prime plus .75% (9.25% at December 31, 1999) .......... $2,373,454

Bank revolving line of credit for $10 million
with a commercial bank collateralized by
all of the Company's U.S. accounts receivable,
intangibles, equipment, fixtures and inventory
and 65% of the common stock of DSI(HK) Ltd.,
principal due on January 22, 1999; interest
at prime (8.5% at December 31, 1999) ................. $2,528,000

Revolving bank loan drawn against an $8 million
line of credit, collateralized by a customer's
letter of credit and $150,000 cash, interest
at prime (8.5% at December 31, 1999) .................. 1,297,921 814,289

Other .................................................... 35,648 22,908
---------- ----------
3,707,023 3,365,197
Less: current portion .................................... 1,313,787 824,675
---------- ----------
$2,393,236 $2,540,522
========== ==========

On February 2, 1999, the Company replaced the previous line of credit with
another revolving credit facility (the "Revolver"). The Revolver includes a $10
million revolving line of credit commitment, subject to availability under a
borrowing base calculated by reference to the level of eligible accounts
receivable and inventory, as defined in the agreement. The Revolver matures on
February 2, 2003. Interest on borrowings outstanding under the Revolver is
payable monthly in arrears at an annual rate equal to prime plus .75%. In
addition, an unused line fee at an annual rate equal to .25% applied to the
amount by which $10 million exceeds the average daily principal balance during
the month and a collateral management fee of $2,000 is payable monthly.

The Revolver contains certain restrictive covenants and conditions among
which are prohibition on payment of dividends, limitations on further
indebtedness, restrictions on dispositions and acquisition of assets,
limitations on advances to third parties and compliance with minimum net worth
amounts.

NOTE 7 - INCOME TAXES:

The components of income (loss) before provision for (benefit from) income
taxes by fiscal year were as follows:

1999 1998 1997
------------ ------------ ------------
Domestic ........... $ (408,523) $ (3,209,516) $(12,142,344)
Foreign ............ 2,558,119 1,872,674 4,750,664
------------ ------------ ------------
$ 2,149,596 $ (1,336,842) $ (7,391,680)
============ ============ ============

F-11

The provision for income taxes (benefit) by fiscal year is as follows:

1999 1998 1997
----------- ----------- -----------

Current:
Federal ............................ $ (106,641) $ (615,358) $ (299,000)
State .............................. -- -- --
Foreign ............................ 253,829 271,358 750,677
----------- ----------- -----------
147,188 (344,000) 451,677
----------- ----------- -----------
Deferred:
Federal ............................ 702,000 17,000 (2,742,000)
State .............................. -- -- --
Foreign ............................ 19,417 (6,000) (39,000)
----------- ----------- -----------
721,417 11,000 (2,781,000)
----------- ----------- -----------
868,605 (333,000) (2,329,323)
Tax on Extraordinary Item (Current Federal) -- -- (270,000)
----------- ----------- -----------
$ 868,605 $ (333,000) $(2,599,323)
=========== =========== ===========

The difference between income taxes (benefit) at the statutory federal and
the effective income tax rates by fiscal year is as follows:

1999 1998 1997
----------- ----------- -----------

Taxes (benefit) computed at statutory rate $ 734,000 $ (364,000) $(2,391,000)
Expired foreign tax credits ............... 44,000 -- --
Reserve against foreign tax credits ....... 87,000 -- --
Other, net ................................ 3,605 31,000 61,677
----------- ----------- -----------
$ 868,605 $ (333,000) $(2,329,323)
=========== =========== ===========

Deferred tax assets (liabilities) are comprised of the following:

DECEMBER 31, 1999 JANUARY 31, 1999
----------------- ----------------

Allowance for doubtful accounts .................. $ 69,000 $ 70,000
Inventory valuation adjustments .................. 32,000 19,000
Depreciation ..................................... 105,000 97,000
Accruals for inventory returns and markdowns ..... 185,000 712,000
Foreign and alternative minimum tax credits ...... 1,403,000 973,000
Life insurance premiums paid for shareholders .... 593,000 525,000
Other ............................................ 226,000 47,000
----------- -----------
Gross deferred tax assets ................. 2,613,000 2,443,000
Less valuation allowance ......................... (680,000) (525,000)
----------- -----------
Net deferred tax assets .......................... 1,933,000 1,918,000
----------- -----------
Unremitted earnings of foreign subsidiary ........ (717,000) --
Depreciation ..................................... (133,340) (113,000)
----------- -----------
Gross deferred tax liabilities ............ (850,340) (113,000)
----------- -----------
Net deferred tax assets (liabilities) ............ $ 1,082,660 $ 1,805,000
=========== ===========

F-12

The Internal Revenue Service regulations restrict the utilization of U.S. net
operating loss carryforwards and other tax attributes such as foreign tax
credits for any company in which an "ownership change" as defined in Section 382
of the Internal Revenue Code has occurred. In June of 1999, the Company had a
Section 382 change in ownership. As a result, the Company's U.S. net operating
losses and tax credits are subject to limitation of approximately $1,230,000 per
year. For the current fiscal year, this limitation did not impact the Company's
utilization of U.S. net operating losses and foreign tax credits.

At December 31, 1999, the Company has $1,315,000 in foreign tax credit
carryforwards which expire between December 31, 2000 through December 31, 2003.
The Company also has $88,000 in alternative minimum tax credit carryforwards
which do not expire. With the exception of $87,000 of foreign tax credits
expiring during the tax year December 31, 2000, the Company believes that the
foreign and alternative minimum tax credit carryforwards will be available to
reduce future federal income tax liabilities, and has recorded the related tax
benefit as non-current deferred tax asset. The Company's state net operating
loss carryforward is not significant.

NOTE 8 - EMPLOYEE BENEFIT PLAN:

The Company maintains a 401(k) Plan (the Plan) for the benefit of its U.S.
employees. The Company may, at its discretion, provide funds to match employee
contributions to the Plan. The Company contributed $27,000, $35,000 and $31,000
in fiscal 1999, 1998 and 1997, respectively, as employer matching contributions
to employee contributions.

NOTE 9 - THE STOCK OPTION PLAN AND WARRANTS:

The Company has reserved 388,888 common shares for issuance upon exercise of
warrants issued to a bank. Such warrants are currently exercisable at a purchase
price of $2 per share and expire December 11, 2005.

In connection with the Offering, the Company issued warrants to purchase
250,000 shares of common stock. Such warrants are exercisable at $10.80 per
share and expire May 28, 2002.

In May 1997, the Board adopted the DSI Toys, Inc. 1997 Stock Option Plan (the
1997 Plan) whereby certain employees may be granted stock options, appreciation
rights or awards related to the Company's common stock. Additionally, the
Company may grant nonstatutory stock options to nonemployee board members. The
Board authorized 600,000 shares to be available for grant pursuant to the 1997
Plan. Options expire no later than ten years from the date of grant.

Additional awards may be granted under the 1997 Plan in the form of cash,
stock or stock appreciation rights. The stock appreciation right awards may
consist of the right to receive payment in cash or common stock. Any award may
be subject to certain conditions, including continuous service with the Company
or achievement of business objectives.

In May 1999, the 1997 Plan was amended to authorize 900,000 shares to be
available for grant.

A summary of the option activity under the 1997 Plan, as amended, follows:

NUMBER OF WEIGHTED AVERAGE
OUTSTANDING OPTIONS OPTION PRICE
--------------------- -----------------

Options outstanding at January 31, 1997 ........... --
Granted ......................................... 533,000 $8.00
----------
Options outstanding at January 31, 1998 ........... 533,000 8.00
Granted ......................................... 82,000 1.41
Surrendered ..................................... (12,000) 8.00
----------
Options outstanding at January 31, 1999 ........... 603,000 7.10
Granted ......................................... 685,500 3.13
Exercised ....................................... (74,666) 1.39
Surrendered ..................................... (467,334) 7.73
----------
Options outstanding at December 31, 1999 .......... 746,500 3.63
==========

The weighted average fair value at date of grant for options granted during
fiscal 1999, 1998 and 1997 was $3.13, $1.41 and $8.00, respectively. Vesting
periods for options granted range from immediate to seven years from the date of
grant in increments between 5% and 90% per year.

F-13

Options outstanding at December 31, 1999 are as follows:

WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE
OPTION PRICE OPTIONS PRICE CONTRACTUAL LIFE OPTIONS PRICE
----------------- --------------- -------------- -------------------- ------------ ------------

$3.125 - 3.25 669,500 3.13 10 - -
8.00 77,000 8.00 8 20,300 8.00
-------- --------
746,500 20,300
======== ========

The Company applies APB 25 and related interpretations in accounting for its
stock option plan. Accordingly, no compensation cost has been recognized by the
Company for this plan. The following unaudited pro forma data is calculated as
if compensation cost for the 1997 Plan was determined based upon the fair value
at the grant date for awards under the plan consistent with the methodology
prescribed under SFAS 123 for fiscal years 1999, 1998 and 1997:

1999 1998 1997
------------- ------------- -------------

Pro forma net earnings (loss) ........................... $ 1,000,150 $ (1,589,283) $ (5,950,660)
Pro forma basic earnings (loss) per common share ........ 0.13 (0.26) (1.14)
Pro forma diluted earnings (loss) per common share ...... 0.13 (0.26) (1.14)

The fair value of each option granted is estimated on the date of grant
using the Black-Scholes options-repricing model with the following weighted
average assumptions used for grants in fiscal 1999, 1998 and 1997: expected
volatility of 104% in fiscal 1999, 80% in fiscal 1998 and 70% in 1997, risk-free
interest rate of 4.64% to 6.52%, no dividend yield and an expected life of seven
years.

NOTE 10 - RELATED PARTY TRANSACTIONS:

The Company leases its office and warehouse in Houston from an entity owned
by the previous sole shareholder of the Company. Rent expense on these leases
was $199,000 for fiscal 1999 and $217,000 each year for fiscal 1998 and 1997.
Management believes that the rental rates approximate fair market value.

In connection with a recapitalization in 1995, the Company paid a director
the sum of $240,000 in three equal payments on January 1, 1998, 1997 and 1996.

On June 11, 1999, the Company entered into a consulting agreement with a
director (and former CEO), for a term of three years. Compensation for the three
year term is $450,000 payable in equal monthly installments of $12,500.

On January 7, 2000, the Company borrowed $5,000,000 from MVII, LLC (a
California limited liability company controlled by the Chairman, and including
certain other directors) evidenced by a Promissory Note. The Note, which bears
interest at a rate of prime plus 2% per annum, requires monthly interest
payments from the date of the Note and principal payments beginning June 1,
2000, subject to subordination terms of the Revolver (Note 6).

Also on January 7, 2000, as discussed on Note 15, the Company merged with
Meritus Industries, Inc. Pursuant to the merger terms, one of Meritus' primary
shareholders was subsequently elected to the Board. In addition to the stock
received in the transaction, the shareholder received $1.1 million in cash
($300,000 paid in 1999), and a note receivable for $1.7 million. The note,
bearing interest at 10.0375% per annum, requires quarterly principal and
interest payments beginning April 1, 2000.

Additional related party transactions are described in Notes 1 and 11.

NOTE 11 - COMMITMENTS AND CONTINGENCIES:

In the normal course of business, the Company is involved in product and
intellectual property issues which sometimes result in litigation. It is the
opinion of management that the ultimate resolution of such matters will not have
a material adverse effect on the Company's financial position or results of
operations taken as a whole.

The Company leases its facilities under various operating leases which expire
from 2001 to 2010. Rent expense, including amounts paid to a related party, for
fiscal 1999, 1998, and 1997 amounted to $573,000, $625,000 and $693,000,
respectively. Aggregate minimum rental commitments under noncancelable leases
are as follows for the specified fiscal years:

F-14

2000 $ 798,512
2001 583,612
2002 389,768
2003 167,316
-----------
$ 1,939,208
===========

Royalty expense under licensing agreements aggregated $1,829,000, $1,298,000
and $3,069,000, in fiscal 1999, 1998 and 1997, respectively. At December 31,
1999, minimum guaranteed royalties payable under these agreements in fiscal 2000
and thereafter through 2002 of $297,000 and $408,000, respectively, are included
in accrued royalties payable and prepaid expenses and other assets.

The Company pays insurance premiums for certain life insurance policies owned
by the Tommy and JoBeth Moss Joint Life Insurance Trust, (the "Trust"), and is
entitled to repayment of the advanced premiums, plus related cumulative
interest, upon the death of JoBeth Moss. These premiums are recorded as general
and administrative expense and amounted to approximately $243,000, $265,000 and
$357,000 for fiscal 1999, 1998, and 1997, respectively. Premium payments of
$265,000 annually are to be made by the Company until the death of Jo Beth Moss.
Based upon the actuarially determined life of Jo Beth Moss (through 2022),
estimated remaining payments to the Trust by the Company would total
approximately $5,800,000 at December 31, 1999.

NOTE 12 - SEGMENT INFORMATION:

The Company designs, develops, markets and distributes a variety of toys and
children's consumer electronics. These product lines are grouped into three
major categories which represent the Company's operating segments, as follows:

Juvenile audio products, including walkie-talkies, pre-school audio products,
pre-teen audio products and musical toys; girls' toys, including dolls, play
sets and accessories; and boys' toys, including radio control vehicles, action
figures and western and military action toys.

These operating segments all have similar economic characteristics: the
marketing of children's products. Based on these similarities, the Company's
products can be aggregated into one reportable segment for purposes of this
disclosure.

The Company sells its products through (i) the Hong Kong operation, where
products are shipped directly from contract manufacturers to the Company's
customers, and (ii) the United States operation, where products are shipped from
the Company's warehouse in Houston to its customers.

Financial information for fiscal 1999, 1998, and 1997 for the U.S. and Hong
Kong operations is as follows:

UNITED STATES HONG KONG CONSOLIDATED
--------------- -------------- --------------

FISCAL 1999:

Net sales ................................ $ 16,419,628 $ 31,140,396 $ 47,560,024
Operating income (loss) .................. (1,527,874) 4,139,162 2,665,288
Depreciation expense ..................... 265,790 463,161 728,951
Capital expenditures ..................... 256,354 831,092 1,087,446
Total assets at fiscal year end .......... 11,134,140 3,893,226 15,027,366

FISCAL 1998:

Net sales ................................ $ 14,817,505 $ 37,905,012 $ 52,722,517
Operating income (loss) .................. (4,376,009) 3,807,193 (568,816)
Depreciation expense ..................... 275,147 295,632 570,779
Capital expenditures ..................... 255,940 705,364 961,304
Total assets at fiscal year end .......... 7,894,703 3,516,076 11,410,779

FISCAL 1997:

Net sales ................................ $ 28,550,033 $ 45,074,365 $ 73,624,398
Operating income ......................... (9,079,471) 2,815,890 (6,263,581)
Depreciation expense ..................... 266,914 394,603 661,517
Capital expenditures ..................... 294,613 432,078 726,691
Total assets at fiscal year end .......... 16,792,866 3,135,853 19,928,719

F-15

Sales to major customers that exceeded 10% of the Company's total net sales
consist of the following for the specified fiscal years:

1999 1998 1997
------------ ------------ ------------
Wal-Mart 21% 19% 17%
Toys "R" Us 7% 11% 22%
Kmart 2% 4% 10%

Approximately 23% of the Company's sales were exports to foreign countries
during fiscal 1999 and 21% and 19% during fiscal 1998 and 1997, respectively.

NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:

Additional cash flow information by fiscal year is as follows:

1999 1998 1997
----------- ----------- -----------

Cash paid (received) for:
Interest ............................... $ 334,932 $ 614,150 $ 379,063
Income taxes ........................... (8,636) (1,149,829) 1,139,929
Noncash activities included the following:
Accounts receivable write-off .......... $ 2,777 $ 63,946 $ 45,932

NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

FISCAL QUARTER ENDED
-----------------------------------------------------------------------
4/30/99 7/31/99 10/31/99 12/31/99
------------ ------------ ------------ ------------

Net sales ................................... $ 3,927,695 $ 14,646,943 $ 22,466,132 $ 6,519,254
Operating income (loss) ..................... (631,394) 472,609 2,867,621 (43,548)
Income (loss) before income taxes ........... (741,246) 373,555 2,672,381 (155,094)
Net income (loss) ........................... (498,285) 215,188 1,686,437 (122,349)
Basic earnings (loss) per share ............. $ (0.08) $ 0.03 $ 0.20 $ (0.01)
Diluted earnings (loss) per share ........... $ (0.08) $ 0.03 $ 0.19 $ (0.01)

F-16

FISCAL QUARTER ENDED
-----------------------------------------------------------------------
4/30/98 7/31/98 10/31/98 12/31/98
------------ ------------ ------------ ------------

Net sales ................................... $ 5,926,126 $ 17,524,808 $ 24,563,262 $ 4,708,321
Operating income (loss) ..................... (863,056) 560,582 2,399,965 (2,666,307)
Income (loss) before income taxes ........... (1,074,380) 375,941 2,150,012 (2,788,415)
Net income (loss) ........................... (711,490) 205,401 1,363,435 (1,861,188)
Basic earnings (loss) per share ............. $ (0.12) $ 0.03 $ 0.23 $ (0.31)
Diluted earnings (loss) per share ........... $ (0.12) $ 0.03 $ 0.23 $ (0.31)

FISCAL QUARTER ENDED
-----------------------------------------------------------------------
4/30/97 7/31/97 10/31/97 12/31/97
------------ ------------ ------------ ------------

Net sales ................................... $ 7,427,707 $ 24,382,768 $ 30,018,242 $ 11,795,681
Operating income (loss) ..................... (360,251) 2,712,958 (6,125,635) (2,490,653)
Income (loss) before income taxes
and extraordinary item .................... (817,249) 2,463,949 (6,361,988) (2,676,392)
Net income (loss) ........................... (547,107) 1,039,167 (4,095,560) (1,939,611)
Basic earnings (loss) per share ............. $ (0.16) $ 0.19 $ (0.68) $ (0.32)
Diluted earnings (loss) per share ........... $ (0.16) $ 0.19 $ (0.68) $ (0.32)

NOTE 15 - SUBSEQUENT EVENT:

On January 7, 2000 the Company acquired Meritus Industries, Inc.
("Meritus") by way of a merger. Pursuant to the terms of the merger, Meritus was
merged with and into the Company, with DSI being the surviving company in the
merger. In the merger transaction, the Company acquired all of the issued and
outstanding stock of Meritus for 600,000 shares of the Company's common stock,
$1.1 million in cash and a note for $1.7 million paid to the shareholders of
Meritus. The note, bearing interest at 10.0375% per annum, requires quarterly
principal and interest payments beginning April 1, 2000. Contemporaneously with
the merger, DSI satisfied $4.4 million of Meritus' debt.

In connection with the acquisition of Meritus, the Company borrowed
$5,000,000 from MVII, LLC evidenced in a promissory note dated January 7, 2000.
The Note bears interest at a rate of prime plus 2%, matures on July 1, 2004, and
is subordinated to the Revolver. The proceeds from the Note were used primarily
to facilitate the merger, including the satisfaction of the Meritus debt
discussed above.

F-17

DSI TOYS, INC. AND SUBSIDIARY

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (SCHEDULE II)

(IN THOUSANDS)

BALANCE AT CHARGED TO BALANCE AT CHARGED TO
JANUARY COSTS AND JANUARY COSTS AND
DESCRIPTION 31, 1997 EXPENSES DEDUCTIONS 31, 1998 EXPENSES
------------- ------------ ------------ ------------ ------------ ------------

Reserves deducted
from assets:

Trade receivables ............. 105 145 (46) 204 (17)

Discounts and
markdowns ................... 771 2,447 (1,261) 1,957 1,559

Return of defective
goods ....................... 217 2,617 (2,004) 830 2,416

Inventory .....................
------ ------ ------ ------ ------
1,093 5,209 (3,311) 2,991 3,958
====== ====== ====== ====== ======

BALANCE AT CHARGED TO BALANCE
JANUARY COSTS AND AT DECEMBER
DESCRIPTION DEDUCTIONS 31, 1999 EXPENSES DEDUCTIONS 31, 1999
------------- ------------ ------------ ------------ ------------ -------------

Reserves deducted
from assets:

Trade receivables ............. (64) 123 66 (3) 186

Discounts and
markdowns ................... (2,132) 1,384 1,041 (1,696) 729

Return of defective
goods ....................... (2,838) 408 2,400 (1,726) 1,082

Inventory ..................... 100 100
------ ------ ------ ------ ------
(5,034) 1,915 3,607 (3,425) 2,097
====== ====== ====== ====== ======

S-1

EXHIBIT INDEX

2.1 Articles/Certificate of Merger of Meritus Industries, Inc. into
the Company, dated January 7, 2000 (filed as Exhibit 2.2 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.

3.1 Amended and Restated Articles of Incorporation of the Company. (1)

3.1.1 Amendment to Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 3.1.1 to the Company's Form 10-Q for the
quarterly period ended April 30, 1999), incorporated herein by
reference.

3.2 Amended and Restated Bylaws of the Company. (1)

3.3 Amendment to Amended and Restated Bylaws of the Company. (1)

4.1 Form of Common Stock Certificate. (1)

4.2 Form of Warrant Agreement among the Company and Representatives to
purchase 250,000 shares of common stock. (1)

4.3 Common Stock Purchase Warrant No. A-1 dated December 11, 1995,
issued to Hibernia Corporation to purchase 388,888 shares of
common stock. (1)

4.4 Registration Rights Agreement by and between the Company and
Hibernia Corporation. (1)

4.5 Registration Rights Agreement by and between the Registrant and
Tommy Moss. (1)

10.1 1997 Stock Option Plan. (1)

10.2 Agreement for Sale of Stock between Rosie Acquisition, L.L.C. and
DSI Acquisition, Inc. and Diversified Specialists, Inc. and Tommy
Moss, dated December 11, 1995. (1)

10.3 Employment Agreement dated December 11, 1995 by and between the
Company and M. D. Davis. (1)

10.4 Employment Agreement dated December 11, 1995 by and between the
Company and Richard R. Neitz. (1)

10.5 Employment Agreement dated December 11, 1995 by and between the
Company and Yau Wing Kong. (1)

10.6 Employment Agreement dated December 11, 1995 by and between the
Company and Dale Y. Chen. (1)

10.7 Employment Agreement dated December 11, 1995 by and between the
Company and Thomas V. Yarnell. (1)

10.8 Employment Agreement dated March 16, 1997 by and between the
Company and J. Russell Denson. (1)

10.9 Letter Loan Agreement between the Company and Bank One, Texas,
N.A. dated December 11, 1995, evidencing a revolving line of
credit and a term note (the "Bank One Letter Loan Agreement"). (1)

10.10 First Amendment to Bank One Letter Loan Agreement, dated January
31, 1996. (1)

10.11 Second Amendment to Bank One Letter Loan Agreement, dated August
1, 1996. (1)

10.12 Third Amendment to Bank One Letter Loan Agreement, dated November
14, 1996. (1)

10.13 Fourth Amendment to Bank One Letter Loan Agreement, dated January
31, 1997. (1)

10.14 Fifth Amendment to Bank One Letter Loan Agreement, dated January
31, 1997. (1)

10.15 Line of Credit Facility with State Street Bank and Trust Company,
Hong Kong Branch, dated April 1, 1997, evidencing a $5,000,000
line of credit. (1)

10.16 Underwriting Agreement dated May 28, 1997 among the Company, the
Tommy Moss Living Trust, Hibernia Corporation and Tucker Anthony
Incorporated and Sutro & Co. Incorporated (filed as Exhibit 10.1
to the Company's Form 10-Q for the quarterly period ended April
30, 1997), incorporated herein by reference.

E-1

10.17 Warrant Agreement dated May 28, 1997 by and among the Company,
Tucker Anthony Incorporated and Sutro & Co. Incorporated (filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarterly period
ended April 30, 1997), incorporated herein by reference.

10.18 Renewal and Modification of Line of Credit Facility with State
Street Bank and Trust Company, Hong Kong Branch, dated June 6,
1997, evidencing an $8,000,000 line of credit (filed as Exhibit
10.1 to the Company's Form 10-Q for the quarterly period ended
July 31, 1997), incorporated herein by reference.

10.19 Debenture by DSI(HK) Limited to State Street Bank and Trust
Company, Hong Kong Branch, dated July 29, 1997 (filed as Exhibit
10.2 to the Company's Form 10-Q for the quarterly period ended
July 31, 1997), incorporated herein by reference.

10.20 Amended and Restated Bank One Letter Loan Agreement, dated October
22, 1997 (filed as Exhibit 10.1 to the Company's Form 10-Q for the
quarterly period ended October 31, 1997), incorporated herein by
reference.

10.21 First Amendment to Amended and Restated Bank One Letter Loan
Agreement, dated January 31, 1998 (filed as Exhibit 10.21 to the
Company's Form 10-K for the annual period ended January 31, 1998),
incorporated herein by reference.

10.22 Second Amendment to Amended and Restated Bank One Letter Loan
Agreement, dated September 30, 1998 (filed as Exhibit 10.22 to the
Company's Form 10-Q for the quarterly period ended October 31,
1998), incorporated herein by reference.

10.23 Employment Agreement dated August 20, 1998 by and between the
Company and Howard G. Peretz. (2)

10.24 Loan and Security Agreement by and between the Company and Sunrock
Capital Corp. dated February 2, 1999. (2)

10.25 Stock Pledge Agreement by and between the Company and Sunrock
Capital Corp. dated February 2, 1999. (2)

10.26 Assignment of Deposit Account by and between the Company and
Sunrock Capital Corp. dated February 2, 1999. (2)

10.27 Trademark Security Agreement by and between the Company and
Sunrock Capital Corp. dated February 2, 1999. (2)

10.28 Patent Collateral Assignment by and between the Company and
Sunrock Capital Corp. dated February 2, 1999. (2)

10.29 Stock Purchase and Sale Agreement dated April 15, 1999 by and
between the Company and MVII, LLC (filed as Exhibit 2 to the
Company's Schedule 14D-9 filed by the Company on April 22, 1999),
incorporated herein by reference.

10.30 Stock Purchase and Sale Agreement, dated April 15, 1999, between
the Company and MVII, LLC (filed as Exhibit 99.2 to the Schedule
14D-9 filed by the Company on April 22, 1999), incorporated herein
by reference.

10.31 Shareholders' and Voting Agreement dated April 15, 1999, by and
among the Company, MVII, LLC, certain management shareholders of
the Company and a limited partnership controlled by a management
shareholder (filed as Exhibit 99.4 to the Schedule 14D-9 filed by
the Company on April 22, 1999), incorporated herein by reference.

10.32 Registration Rights Agreement dated April 15, 1999, by and among
the Company, MVII, LLC, certain management shareholders of the
company and a limited partnership controlled by a management
shareholder (filed as Exhibit 99.5 to the Schedule 14D-9 filed by
the Company on April 22, 1999), incorporated herein by reference.

E-2

10.33 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Conrad. (3)

10.34 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Davis. (3)

10.35 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Matlock. (3)

10.36 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and Rust
Capital. (3)

10.37 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Smith. (3)

10.38 Consulting Agreement dated June 1, 1999, between the Company and
Davis. (3)

10.39 Amendment dated May 5, 1999, to Loan and Security Agreement, dated
as of February 2, 1999, by and between Sunrock Capital Corp. and
the Company. (3)

10.40 Amendment No. 1 dated June 30, 1999, to Loan and Security
Agreement, by and between Sunrock Capital Corp. and the Company.
(4)

10.41 Employment Agreement dated June 17, 1999 by and between the
Company and Michael J. Lyden. (4)

10.42 Employment Agreement dated June 1, 1999, by and between the
Company and Joseph S. Whitaker. (4)

10.43 Amendment to 1997 Stock Option Plan dated May 24, 1999. (4)

10.44 Restated Employment Agreement dated December 31, 1999, by and
between DSI(HK) Limited and Yau Wing Kong.

10.45 Agreement and Plan of Merger between Meritus Industries, Inc. et
al, and the Company, dated October 7, 1999 (filed as Exhibit 10.45
to the Company's Form 10-Q for the quarterly period ended October
31, 1999), incorporated herein by reference.

10.46 Closing and Holdback Agreement dated January 7, 2000, by and
between the Company and Meritus Industries, Inc., et al. (filed as
Exhibit 2.3 to the Company's Form 8-K dated January 7, 2000),
incorporated herein by reference.

10.47 Shareholders' and Voting Agreement dated January 7, 2000, by and
among the Company, MVII, LLC and Walter S. and Susan Reiling
(filed as Exhibit 10.1 to the Company's Form 8-K dated January 7,
2000), incorporated herein by reference.

10.48 Limited Irrevocable Proxy dated January 7, 2000, between MVII, LLC
and Walter S. and Susan Reiling (filed as Exhibit 10.2 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.

10.49 Registration Rights Agreement dated January 7, 2000, by and
between the Company and Walter S. and Susan Reiling (filed as
Exhibit 10.3 to the Company's Form 8-K dated January 7, 2000),
incorporated herein by reference.

10.50 Subordinated Secured Promissory Note dated January 7, 2000, from
the Company to Walter S. and Susan Reiling (filed as Exhibit 10.4
to the Company's Form 8-K dated January 7, 2000), incorporated
herein by reference.

10.51 Promissory Note dated January 7, 2000, from the Company to MVII,
LLC (filed as Exhibit 10.5 to the Company's Form 8-K dated January
7, 2000), incorporated herein by reference.

10.52 Amendment No. 2 dated January 7, 2000, to Loan and Security
Agreement, by and between Sunrock Capital Corp. and the Company
(filed as Exhibit 10.6 to the Company's Form 8-K dated January 7,
2000), incorporated herein by reference.

10.53 Employment Agreement dated January 7, 2000, by and between the
Company and Beth Reiling (filed as Exhibit 10.7 to the Company's
Form 8-K dated January 7, 2000), incorporated herein by reference.

E-3

10.54 Employment Agreement dated January 7, 2000, by and between the
Company and Joseph Reiling (filed as Exhibit 10.8 to the Company's
Form 8-K dated January 7, 2000), incorporated herein by reference.

21 Subsidiaries. *

27 Financial Data Schedule. *

(1) Filed as a part of the Registrant's Registration Statement on Form S-1
(No. 333-23961) and incorporated herein by reference.

(2) Filed as the indicated numbered exhibit to the Company's Form 10-K for the
annual period ended January 31, 1999, and incorporated herein by reference.

(3) Filed as the indicated numbered exhibit to the Company's Form 10-Q for the
quarterly period ended April 30, 1999, and incorporated herein by
reference.

(4) Filed as the indicated numbered exhibit to the Company's Form 10-Q for the
quarterly period ended July 31, 1999, and incorporated herein by reference.

* Filed herewith.

E-4